Digital inclusion and mobile sector taxation in Mexico

AUGUST 2015 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

Important Notice from Deloitte

This final report (the “Final Report”) has been Accordingly, no representation or warranty, express prepared by Deloitte LLP (“Deloitte”) for the GSMA on or implied, is given and no responsibility or liability the basis of the scope and limitations set out below. is or will be accepted by or on behalf of Deloitte or by any of its partners, employees or agents or The Final Report has been prepared solely for the any other person as to the accuracy, completeness purposes of assessing the economic impacts of mobile or correctness of the information contained in this sector taxation in Mexico by modelling the potential document or any oral information made available and impacts that could be realised by a change in mobile any such liability is expressly disclaimed. taxation under a set of agreed assumptions and scenarios. It should not be used for any other purpose All copyright and other proprietary rights in the Final or in any other context, and Deloitte accepts no Report are the property of the GSMA. responsibility for its use in either regard. This Final Report and its contents do not constitute No party other than GSMA is entitled to rely on the financial or other professional advice, and specific Final Report for any purpose whatsoever and Deloitte advice should be sought about your specific accepts no responsibility or liability or duty of care to circumstances. In particular, the Final Report does any party other than the GSMA in respect of the Final not constitute a recommendation or endorsement by Report or any of its contents. Deloitte to invest or participate in, exit, or otherwise use any of the markets or companies referred to in As set out in the contract between Deloitte and it. To the fullest extent possible, both Deloitte and GSMA, the scope of our work has been limited by the GSMA disclaim any liability arising out of the use the time, information and explanations made available (or non-use) of the Final Report and its contents, to us. The information contained in the Final Report including any action or decision taken as a result of has been obtained from the GSMA and third party such use (or non-use). sources that are clearly referenced in the appropriate sections of the Final Report. Any results from the Deloitte contact analysis contained in the Final Report are reliant Davide Strusani on the information available at the time of writing Director, TMT Economic Consulting, London the Final Report and should not be relied upon in [email protected] subsequent periods. www.deloitte.co.uk

2 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

CONTENTS

IMPORTANT NOTICE FROM DELOITTE 2

EXECUTIVE SUMMARY 5

1 THE MOBILE INDUSTRY IN MEXICO 14 1.1 Mobile services are enabling digital inclusion in Mexico 14 1.2 Mobile services are a key driver of social and economic development 15 1.3 Current gaps in digital inclusion 19 1.4 Policy reforms and the future of mobile 27 1.5 Assessing the impact of taxation on digital inclusion in Mexico 28

2 TAXATION ON THE MOBILE SECTOR IN MEXICO 29 2.1 Taxes on mobile consumers in Mexico 29 2.2 Taxes and fees levied on mobile operators in Mexico 31 2.3 Best practice in taxation policy 35

3 CASE STUDIES: IMPACTS OF MOBILE TAXATION CHANGES 38

4 ECONOMIC IMPACTS OF REFORMING MOBILE TAXATION IN MEXICO 41 4.1 How mobile taxation in Mexico impacts the economy 41 4.2 Reducing the IEPS on mobile services to 1.5% 43 4.3 Removing the IEPS on mobile services 44 4.4 Reducing the regulatory fees by 10% 46 4.5 Pricing of spectrum and other regulatory fees 47

5 MOBILE TAXATION IN MEXICO: AN AGENDA FOR REFORM 49 5.1 Contribution to fiscal stability 49 5.2 Options to align mobile taxation to standard goods taxation 50 Appendix A Methodology 52

3 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

Mobile services support digital inclusion and economic and social development in Mexico.

4 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

Executive Summary

Mobile services are critical for digital inclusion and economic and social growth in Mexico

Mobile services in Mexico currently connect • Mobile is the most cost-effective way of 47 million unique subscribers, 38% of the extending access to broadband, driving population, and while most of the connected the growth of the knowledge economy Mexican subscribers still use 2G services, and developing digital capabilities across faster speeds are increasingly available. all sectors of the economy. The ITU has Although more progress is needed, mobile estimated that in 2015, the global average services are already making a number of price of a basic fixed broadband plan is positive contributions to the Mexican 1.7 times higher than the average price of economy and society: a comparable mobile broadband plan.

• Mobile promotes digital inclusion, enabling • Mobile has the potential to support and many more Mexicans to benefit from the enhance social development. For example, exchange of information for business applications like “Mi bebe”, a health service and social purposes and from increased for pregnant women, provide locally productivity, and can potentially improve relevant content that directly impacts access to education, healthcare and on users’ quality of life. Further, mobile government services. These impacts can banking services such as Transfer and Fondo help the government toward achieving the Personal MiFon help to extend banking national goals of sustainable and inclusive services to the unbanked, while initiatives economic growth outlined in the National such as those in the TELMEX Digital Development Plan 2013-2018. Education and Culture Program deliver educational Information and Communication • Mobile services are creating economic Technology (ICT) content and training to activity in Mexico, both through the direct promote the digital inclusion of children, contribution of the mobile operators and young people and adults. the indirect value added by the activity of other related sectors as a result of mobile operators’ expenditure on their services. However, despite the progress the mobile GSMA/Deloitte carried out a study of industry has made in extending mobile access these impacts in 2012 and estimated that and digital inclusion over the recent years, operators directly created USD 2.7 billion in the majority of Mexicans do not yet have a value add in 2011. Operators’ expenditure mobile connection, and even more Mexicans across the mobile ecosystem contributed a lack access to mobile internet and broadband further USD 4.6 billion in 2011. The induced services. Approximately 54 million adults are impacts resulting from subsequent rounds not yet mobile subscribers, and Mexico’s mobile of expenditure created by these direct and internet penetration rate is the second lowest in indirect spend was estimated at USD 2.9 Latin America. Low income earners and women billion in 2011. Extending access to mobile in rural communities are especially at risk of has the potential to increase GDP growth, being left behind. employment, tax revenues and long-term economic and fiscal stability.

5 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

Seeking to extend ICT access, the government are intended to address these issues. These and international organisations have identified reforms have three pillars – national coverage, affordability and investment as key issues that competitive prices and quality of service. The create barriers to digital inclusion. First, devices reforms involve changes to the mobile market, and services remain unaffordable for many including a set of regulatory changes, a public- Mexicans, particularly those in the poorest private partnership network and a “universal segments of the population. A basic device digital inclusion” policy. As a result of these accounts for over 5% of annual income for the reforms, several new regulations have been poorest 10% of households, and more advanced introduced in the mobile market: for example smartphones are even more unaffordable. a number of wholesale services (e.g. mobile Second, further investment is needed to extend call termination, SMS termination, national networks and improve service quality. Mexico roaming, and MVNO access) are now subject has the lowest level of mobile investment per to regulation and lower rates. If successful, capita among the signatories to the Convention the reforms have the potential to increase on the Organisation for Economic Cooperation subscription, usage and economic growth. and Development (OECD countries), and However, there is considerable debate over provision of network capacity is required to aspects of these reforms. ensure users can access the benefits of high- speed mobile broadband. Even in these reforms, the government has not yet addressed the policy issue of Against this background, the Mexican imbalanced taxation on the mobile sector, government has recently introduced a series which creates significant costs for mobile of wide regulatory and policy reforms that consumers and operators.

Higher taxation on mobile compared to other goods risks reducing the impact of the government’s reforms, growth in the mobile sector and Mexico’s overall economic growth.

Mobile consumers pay the Impuesto Especial This tax burden on consumers can lead to sobre Produccion y Servicios (IEPS) tax on reduced demand for mobile services, slowing mobile airtime and SMS. The IEPS is a special the growth of the sector. This burden can be tax on production and services that is levied particularly problematic in Mexico because on certain goods and services such as sales of affordability is a key barrier. alcoholic beverages, tobacco, gasoline, diesel, gambling and betting, and telecommunication services. This tax adds to the cost of service consumption and the overall cost of owning and using a mobile phone. When all taxes on devices and services are taken into consideration, taxes accounted for nearly 19% of the Total Cost of Mobile Ownership in Mexico in 2014.

6 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

Today 47 million people, or 38% of the population, in Mexico have at least one mobile subscription. But mobile services remain unaffordable to many.

7 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

Affordability of mobile services and devices by income group (2012)

25% $45

$40

20% $35

$30 15% $25

$20 10% USD, thousands USD,

% of household income $15

$10 5%

$5

0% $0 1 2 3 4 5 6 7 8 9 10 (Poorest (Richest 10% of Household income decile group 10% of households) households)

Annual household income (USD$) Basic device cost (% of household income, left axis) Premium device cost (% of household income, left axis) Utility device cost (% of household income, left axis) Mobile broadband, postpaid 500 mb cost (% of household income) Mobile broadband, prepaid 500 mb cost (% of household income)

Source: Deloitte analysis based on income statistics from Instituto Nacional de Estadística y Geografía (INEGI), device prices from Gartner and mobile broadband prices from the ITU Measuring the Information Society 2013 Figure 1

Operators are also subject to a number of taxes and regulatory fees, including general taxes such as the corporation tax, customs duties and customs processing fees, and fees paid to the national telecommunications regulator. Mobile operators’ contribution to the government through annual regulatory fees is amongst the highest globally. The share of Mexican operators’ revenues spent on regulatory fees is the third highest amongst 26 countries for which data is available.

8 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

Recurring regulatory fees as a percentage of revenues

25%

20%

15%

10%

5%

0% Peru Chile Chad Brazil Egypt Kenya Ghana Gabon Turkey Jordan Mexico Tunisia Nigeria Croatia Ecuador Average Panama Uruguay Hungary Jamaica Thailand Pakistan Tanzania Sri Lanka Colombia Cameroon Bangladesh South Africa

Source: Deloitte analysis based on Mexican operator data for 2014 and GSMA/Deloitte (2015): “Digital inclusion and mobile sector taxation”. Figure 2

As a result of taxes on mobile consumers and operators, the mobile industry paid more than USD 4.5 billion in recurring tax and fee payments in 2014, contributing 1.5% of total government tax revenues in Mexico.

Mobile-specific taxes are inefficient and can limit digital inclusion and economic growth in Mexico.

Mobile services create positive externalities across society by facilitating communication and the flow of the information, increasing productivity throughout the economy. However, mobile consumers and operators face sector-specific taxes in Mexico, similar to products such as alcohol, tobacco and gambling for which governments typically find it desirable to discourage consumption. This may disincentivise digital inclusion and limit the benefits that mobile is able to provide to the Mexican society and the economy.

Furthermore, the mobile-specific taxes that are levied in Mexico do not appear to fully align with many of the recognised principles of taxation outlined by organisations such as the IMF. For example, the OECD recently noted that “It is difficult to justify a specific sectoral tax, such as the IEPS, as it places a needless burden on the telecommunications industry”. The table below highlights these principles and the potential impacts of mobile-specific taxation on the Mexican economy.

9 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

Alignment of taxes and regulatory fees on the mobile sector in Mexico with the principles of taxation

1. In general, taxation should be broad based

Mobile specific taxes such as the IEPS tax may lead to inefficiently low consumption and investment in the mobile sector.

• The IEPS is not broad-based and is levied on mobile services and a limited number of “luxury” goods and services and may create distortions in consumers’ purchasing decisions

2. Taxes should account for sector and product externalities

Mobile specific taxes fail to account for positive externalities and spillovers onto other sectors.

• In addition to the IEPS, mobile is subject to a number of sector-specific regulatory fees even though the sector generates positive impacts in the wider economy through spillover effects. Taxing mobile in a disproportionate manner could be taken as a signal that the government wishes to discourage rather than encourage consumption.

3. The tax system should be simple, understandable and enforceable

Uncertainty and lack of transparency over taxation systems and liabilities may deter investors and are also likely to increase enforcement costs for government.

• Taxes on the mobile sector have increased in recent years due to the imposition of IEPS on the mobile sector and an increase in the corporation tax rate.

4. Incentives for competition and investment should be unaffected

Higher taxes on a given industry compared to other sectors reduce the incentives for investment in the industry, both domestically and internationally and could reduce investment in infrastructure and quality of service improvements.

• The share of operators’ revenues spent on regulatory fees is the third highest compared to a survey of 26 countries.

5. Taxes should not be regressive

Taxes on mobile lead to a disproportionate burden on poorer citizens, and risk excluding them from the benefits of digital and financial inclusion.

• Mobile-specific taxes such as the IEPS increase barriers to access and hit the poorest consumers hardest.

Table 1

10 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

By transitioning to a tax system where mobile is treated equally to other goods, the Mexican government can promote digital inclusion, economic growth and fiscal stability.

Mobile operators recognise the role of to expand mobile broadband network the industry in supporting government infrastructure. A phased movement toward revenues and contributing to public services. eliminating sector-specific taxation would be However, taxation on mobile could potentially consistent with principles of efficient taxation deliver short-term benefits to government recommended by international organisations revenues at the cost of long-run socio- such as the IMF. economic development. The current reform policies implemented by the government A model of the Mexican mobile sector and offer an opportunity to correct existing its macroeconomic impacts was used to digital inclusion gaps, and a realignment of estimate the impacts of changes to taxation mobile taxation could enhance the success on mobile penetration, economic growth and of these reforms. tax revenues. The quantitative impacts of a series of potential reforms are estimated in By transitioning to a taxation structure where this report. the mobile industry is treated equally to other sectors of the economy, the Mexican Reducing the IEPS on mobile services government can increase digital inclusion from 3% to 1.5% would reduce the cost of and economic growth, but also has the mobile services for consumers, incentivising potential to generate higher tax revenues many non-subscribers to acquire a mobile through more efficient and broader-based connection for the first time. As a result, this taxation. Complementing the existing market could add an additional 4.6 million mobile reforms implemented by the government, connections between 2016 and 2020, of reforming mobile taxation has the potential which approximately 2.9 million are expected to further enable the investment required to be mobile broadband connections.

Potential impact of reducing the IEPS on mobile services to 1.5% relative to the base case, 2020

GDP +USD 2,227m Market Mobile penetration revenues +1,108,000 net of tax connections +USD 222m REDUCING THE IEPS ON MOBILE Employment SERVICES TO 1.5% +15,000 3G/4G penetration Economy wide +766,000 investment +USD 537m connections Tax revenues +USD 294m

Source: Deloitte analysis based on operator, GSMA intelligence database, IMF and World Bank data Figure 3 11 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

Enhanced mobile usage would drive growth as a result of the enhanced economic activity within the sector and its supply chain and enabled by increased mobile penetration. increase productivity for new users. As a Taking into consideration the initial loss in result of this enhanced economic activity, the tax revenues resulting from the decrease in government of Mexico could achieve revenue the tax rate, over the period 2016-2020, the neutrality within two years and gain up to government could experience a net revenue USD 294 million in additional revenues in gain of USD 1.3 billion. 2020, equivalent to nearly USD 950 million cumulatively over the years 2016-2020. Reducing operators’ annual regulatory fee payments by 10% would reduce the Completely removing the IEPS on mobile distortionary impact of these fees on services would have an even greater impact investment. If the operators pass a proportion on digital inclusion, doubling the number of of these savings onto consumers in the form new connections to 2.2 million in 2020 alone, of lower prices, reduced annual regulatory and creating a cumulative 9.2 million new fees could increase demand for mobile connections over the period 2016-2020. services. Under this assumption this has the potential to lead to increased aggregate This greater reduction in the tax level could investment by up to USD 882 million also allow the government to achieve a cumulatively from 2016-2020. neutral tax revenue impact within two years

Potential impact of reducing the regulatory fees by 10% relative to the base case, 2020

GDP +USD 591m Market Mobile penetration revenues +294,000 net of tax connections +USD 59m REDUCING THE REGULATORY FEES Employment BY 10% +3,000 3G/4G Penetration Economy wide +203,000 investment +USD 142m connections Tax revenues +USD 78m

Source: Deloitte analysis based on operator, GSMA intelligence database, IMF and World Bank data Figure 4

12 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

Moreover, despite an initial fall in tax revenues after the reduction in tax, the government could potentially achieve tax neutrality within two years and in 2020 the increase in GDP growth could enable up to an additional USD 78 million in tax revenues to be collected through more broad-based taxation.

By incentivising investment, the reduction of regulatory fees could further encourage network roll-out and increases in quality of service. Wider economic growth generated by the tax reduction could also allow the government to achieve a neutral impact on tax revenues within two years.

Based on evidence from a series of studies and best practice principles in taxation, as well as on consultation with GSMA and mobile operators, a number of areas for tax reform have been identified which could complement the existing market reforms and support the mobile sector to further contribute to economic growth and government revenues over and above its current impact:

• Reduce specific taxation of the mobile sector: Higher than normal taxation on mobile operators and consumers distorts production and consumption behaviour; it may limit usage of digital services, reduce the ability of mobile operators to finance investment in digital infrastructure, and can in the long term reduce government revenues.

• Apply phased reductions of taxes on established services: A phased reduction of mobile specific taxes offers the government the opportunity to benefit from the economic contribution from mobile whilst limiting short-term fiscal costs.

• Facilitate the development of emerging services through supportive taxation: The growth of mobile data and other innovative services such as M2M applications open up the possibility for the sector to increase its economic value through a whole new generation of products and services ranging from health care services to education and finance.

• Reduce complexity and uncertainty of mobile taxation: Taxation on the mobile sector has increased over the years in Mexico. Any unpredicted tax change that occurs after investment in spectrum licence is made may negatively impact an operator’s business plan. The risk of future tax rises is priced into investment decisions and can therefore be expected to reduce both FDI and domestic investment in the medium-term.

13 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

The mobile industry 1 in Mexico

1.1 Mobile services are enabling digital inclusion in Mexico

Mexico is the second largest economy in Mobile connectivity grew rapidly after 2G Latin America and also has the second services were first launched in 2004, with the largest mobile market in the region, growth rate of unique subscribers averaging after Brazil. Currently, 47 million unique 10% between 2005 and 2010. Now, Mexicans subscribers, or 38% of the population, can are beginning to access mobile broadband access the benefits of mobile1. The market through increasing 3G coverage. 3G services is led by three operators: Telcel, Movistar, were first launched in 2010, and operators and AT&T 2. In addition, there are seven invested USD$ 236 million for 3G licences5. Mobile Virtual Network Operators (MVNOs)3 4G services have also begun to be rolled out that utilise operators’ networks, with a in 20126 and 2014, and the regulator Instituto planned entry of six new MVNOs using Federal de Telecomunicaciones (Ifetel) has Movistar’s network4. stated that further 4G spectrum will be auctioned in 20157.

Figure 5: Total mobile penetration, 3G and 4G penetration in Mexico

90%

80%

70%

60%

50%

40%

30%

20%

10%

0% 2011 2012 2014 2013 2015 2010 2007 2005 2006 2008 2009

Mobile penetration – connections Mobile penetration – unique subscribers Mobile penetration – 3G+4G unique subscribers

Source: GSMA Intelligence Database Figure 5

1. Unique subscriber penetration refers to the percentage of the market population that owns at least one mobile connection. Mobile penetration, in contrast, refers to the percentage of connections of the total market population and can thus be more than 100% if there are more connections than unique subscribers. 2. AT&T has recently established a presence in the market by the acquisitions of Grupo Iusacell and Nextel. Source: BuddeComm, 2015. Mobile Market Insights, Statistics and Forecasts, and Economist Intelligence Unit (EIU) – Telecommunications report Mexico. 3. Mobile virtual network operators. 4. Economist Intelligence Unit (EIU) – Telecommunications report Mexico. 5. GSMA Intelligence database and BuddeComm, 2015. Mobile Market Insights, Statistics and Forecasts. 6. GSMA Intelligence database. 7. http://www.ift.org.mx/sites/default/files/pabf_2015.pdf. 14 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

The mobile industry has already made representative basket of fixed-line services significant contributions to increasing was found to cost 2.3% of gross national digital inclusion in Mexico. In 2013, the income (GNI) per capita in Mexico in penetration rate of fixed-line telephony 2013, while the mobile basket cost 1.4% was 17% compared to 86% for mobile of GNI per capita10. As a result, mobile is penetration in terms of connections8,9. the leading means for Mexicans to access Mobile is also more affordable – an ITU the social and economic benefits of report on the costs of ICT services a connectivity.

1.2 Mobile services are a key driver of social and economic development

The Mexican government has recognised that low growth and productivity, inequality, poverty, and social exclusion remain important issues for the economy11. In 2012, the country’s three largest political parties agreed on the Pacto por Mexico12, a structural reform package aimed at delivering economic prosperity through reforms to a range of sectors, including telecommunications. The OECD estimates that the reforms have the potential to substantially increase annual trend GDP per capita growth by as much as 1% over the next ten years13.

The commitments made in the Pacto por Mexico were incorporated in the National Development Plan 2013-2018. This sets out a national digital strategy to promote usage and development of ICTs and transform Mexico into an information and knowledge society14. Mobile makes an important contribution to these government objectives and has the potential to make an even greater contribution with the growth of 3G and 4G mobile broadband.

1. Mobile services promote digital becomes increasingly crucial to preserving inclusion and the growth of a national competitiveness. It identifies four pillars knowledge-based economy of knowledge-based economies, one of which is information infrastructure, with technology such Digital inclusion means that the benefits of as mobile phones required to facilitate effective Information and Communication Technology communication and the dissemination and (ICT) should be available to all, regardless processing of information. of location or socioeconomic status. Mobile services provide the most cost-effective way of 2. Mobile services enhance productivity, achieving digital inclusion and, by facilitating the innovation and social development exchange of ideas and information, can support a move towards a knowledge-based economy. By enabling businesses and government to The World Bank15 has stated that the movement deliver their services faster, and at a lower cost, towards a knowledge-based economy should mobile services increase productivity across be the aim of all governments, as knowledge the Mexican economy. Mobile services can

8. A unique subscriber penetration rate is unavailable for fixed line telephony; therefore, total penetration (i.e. the total number of connections as a percentage of population) is referenced here for the purposes of compar- ison. This rate is significantly higher than the 38% unique mobile subscriber penetration referred to elsewhere throughout the report. This is due to the fact that a subscriber may have more than one connection (i.e. SIM card). ITU statistics, see http://www.itu.int/en/ITU-D/Statistics/Pages/stat/default.aspx. 9. According to the telecommunications regulator, Instituto Federal de Telecomunicaciones (Ifetel), the mobile penetration rate was 85.4% in the third quarter of 2014 (mobile penetration rate includes all connections, including multiple connections for individual subscribers), see: http://www.ift.org.mx/sites/default/files/contenidogeneral/comunicacion-y-medios/informe3ertrimestre2014.pdf. 10. ITU, Measuring the Information Society 2014. 11. OECD – Economic Surveys: Mexico overview, 2015 and McKinsey Global Institute – A tale of two Mexicos: Growth and prosperity in a two-speed economy. 12. Pacto por Mexico, 2012. http://pactopormexico.org/PACTO-POR-MEXICO-25.pdf. 13. OECD – Economic Surveys: Mexico overview, 2015. 14. Government of Mexico – National Digital Strategy, 2013. http://embamex.sre.gob.mx/italia/images/pdf/national%20digital%20strategy.pdf. 15. World Bank, The four pillars of a knowledge-based economy, 2009. 15 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

reduce transaction costs, making it less costly • M-Inclusion is a social inclusion platform for Mexicans to communicate and conduct using mobile solutions in Europe and Latin everyday business operations, supporting the America. The aim of the programme is to expansion of businesses and enterprises. The ITU promote cooperation between developers of has estimated that in 2015, the global average mobile solutions in Europe and Latin America, price of a basic fixed broadband plan is 1.7 times and promote digital inclusion through mobile higher than the average price of a comparable for people with disabilities, low incomes, and mobile broadband plan.16 Through wider effects those living in remote areas18. on the economy, mobile broadband helps to increase living standards in Mexico and improve • Transfer & Fondo Personal MiFon are mobile Mexico’s international competitiveness. banking services that are designed to extend banking services to the unbanked. The Mobile services also create opportunities for services allow users to open bank accounts investment, innovation and employment in the without needing to visit a bank, make mobile sector and in a variety of other jobs that payments, send money and withdraw money form part of the mobile ecosystem, such as from ATMs and make airtime purchases using equipment providers, workers in the network SMS19. engineering and maintenance industry, and providers of related business services. • PayClip is a startup mobile payment system that allow individuals and merchants to use Mobile can also enable more effective iOS or Android smartphones to accept debit delivery of public services and support and credit card payments. PayClip thus allows social development. In particular, mobile and small businesses to conduct transactions broadband communication offers an effective and payments in a safe and efficient manner, means of bringing healthcare and education reducing the reliance on cash payments20. services to remote and under-served areas, through m-Government initiatives and mobile • Aldea Digital is the world’s biggest digital applications. inclusion event that takes place in Mexico City, with over 154,000 attendees in 2013. Many initiatives have been launched in Mexico The event organises workshops and training and around the world that harness the potential sessions where people can use the latest of mobile to support social development, technology, such as smartphones, tablets and innovation and productivity. Examples include: computers21.

• Mi bebe provides mobile health monitoring 3. Mobile services promote long-run services that allows health practitioners economic growth to remotely monitor women with high- risk pregnancies and to provide warnings A number of studies have already recognised of abnormalities and to direct women to the economic growth potential of mobile. In specialized clinics when needed. particular:

• The TELMEX Digital Education and Culture • Mobile generates significant economic Program consists of several educational impacts as a result of the value add and initiatives that promotes the digital inclusion employment generated by operators and of children, young people and adults. The by operators’ expenditure across the mobile programmes have identified educational ecosystem. GSMA/Deloitte carried out a study needs, developed content, have training of these impacts in 201222 and estimated that and follow-up to educational strategies operators directly created USD 2.7 billion and support for ICTs. More than 3.5 million in value add in Mexico in 2011. Operators’ people have benefited from the programs expenditure across the mobile ecosystem – since their start17. including payments to airtime and handset

16. ITU, ICT Facts and Figures, 2015. 17. http://www.americamovil.com.mx/investors/reporte2014/DS2ENG.html. 18. http://www.m-inclusion.eu/. 19. www.mifon.mx, https://businesspartnershiphub.org/social-enterprise/projects/view/39/, http://www.banamex.com/transfer/, and http://mex.mobilemoneylatam.com/transfer-mexico-la-alianza-exitosa-entre-telcel-ban- amex-e-inbursa-ofrece-pagos-moviles-via-sms-2/. 20. See https://clip.mx/en-us and Zuccolotto Soto & Valenti, 2013. 21. http://www.americamovil.com.mx/investors/reporte2014/DS2ENG.html. 16 22. GSMA/Deloitte (2012): “Mobile telephony and taxation in Latin America”. DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

retailers, network equipment suppliers • Other research suggests that for every new and handset manufacturers with offices in job created in the mobile sector in countries Mexico, as well as local suppliers of network like Mexico, 6 are generated in the wider equipment, capital items, and support services economy27. – contributed a further USD 4.6 billion in 2011. The induced impacts resulting from 4. Mobile services support Mexico’s subsequent rounds of expenditure created by development objectives these direct and indirect spend was estimated at USD 2.9 billion in 2011. Direct, indirect and Through these positive impacts, the mobile induced employment created in the economy industry can support many of the government’s was estimated at nearly 183,000 full time objectives: equivalent employees (FTEs) in 2011. • The National Development Plan 2013-2018 • The same study found that mobile services have sets out the government’s plan to transform led to productivity increases for businesses and the Mexican economy through structural consumers using mobile services, as well as due reforms aimed at maximising the country’s to M2M services. If mobile workers achieved a potential. The plan involves five national goals 5% increase in their productivity as a result of (Mexico in Peace, Inclusive Mexico, A Mexico using mobile services, the potential productivity with Quality Education, Prosperous Mexico, impact in Mexico would have been over USD 20 and Mexico with Global Responsibility) and billion in 2011. three strategies. The plan aims to deliver more democratic and inclusive institutions, better • Studies by the GSMA and the World Bank education, sustainable and inclusive economic have estimated that a 1% increase in mobile growth, and to ensure Mexico’s role as a penetration could lead to an increase in the positive force in the world28. GDP growth rate of 0.28%, while a 1% increase in internet user penetration in high-income • The National Digital Strategy forms a part countries can lead to an increase of up to of the National Development Plan and serves 0.077% in the GDP growth rate23. to emphasise the importance of establishing a national strategy for promoting usage and • The World Bank has found that in development of ICTs and transform Mexico developing economies, such as Mexico, into a modern and well integrated information every 10% increase in broadband subscriber and knowledge society. The strategy includes penetration24 accelerates economic growth by five enablers – Connectivity, Digital skills 1.38%25. inclusion, Interoperability, Legal framework, and Open data. The “Connectivity” and • A 2012 GSMA/Deloitte/Cisco study found “Digital skills inclusion” enablers aim to that substitution from 2G to 3G connections increase usage and capacity of existing resulted in significant economic benefits26. network infrastructure as well as to promote For a given level of total mobile penetration, development of technologies and digital skills. a 10 per cent substitution from 2G to 3G penetration was found to increase GDP per • The UN Sustainable Development Goals capita growth by 0.15 percentage points. (SDGs) to guide policy to end poverty The study also found that mobile broadband and hunger, ensure inclusive and equitable usage supports growth and that this impact economic growth, quality education, achieve is larger at higher levels of usage. This means economic and gender equality, and improve that countries with low usage like Mexico have well-being of people of all ages. The SDGs are considerable scope for accelerating growth at proposal stage29, and Mexico is a member through increased mobile broadband usage. of the Working Group. The SDG agenda is set

23. This is based on a study of 40 economies over the period 1996-2011; for full details of the methodology, see http://www.gsma.com/publicpolicy/wp-content/uploads/2012/11/gsma-deloitte-impact-mobile-telephony-eco- nomic-growth.pdf; Qiang, C. Z. W., Rossotto, C.M., 2009. Economic Impacts of Broadband, in Information and Communications for Development 2009: Extending Reach and Increasing Impact, World Bank, Washington D.C., 35-50. 24. The distinction between users and subscribers of telecommunications services should be noted. Users refer to individuals who do not necessarily own or pay for telecommunications services, but who have access to such services through work, family etc. Subscribers, on the other hand, are individuals who pay for subscriptions to such services, to which a number of individuals may have access. Based on ITU, 2014. Manual for measuring ICT Access and Use by Households and Individuals. 25. Qiang, C. Z. W., Rossotto, C.M., 2009. 26. GSMA/Deloitte/Cisco (2012): “What is the impact of mobile telephony on economic growth?”. 27. This figure was based on a number of studies conducted in developing and developed countries; see, for example, Moretti, 2010, O2 for ONS, 2002, Ovum, 2010; Zain, Ericsson, 2009,Kaliba et al, 2006. 28. Government of Mexico – National Development Plan 2013-2018. 29. For the SGD proposal, see: https://sustainabledevelopment.un.org/sdgsproposal. 17 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

to be finalised and agreed upon in September 2015. It is expected that the SDGs will build on the UN Millennium Development Goals (MDGs) that have been adopted by Mexico.

The role of mobile in driving economic growth in Mexico

National Development Plan 2013-2018 National Digital Strategy Sustainable Development Goals (SDGs) Government policies Government

Transform the economy through Part of the National Development structural reforms aimed at maximising Plan. Emphasises the importance of End poverty and hunger, ensure inclusive the country’s potential. The plain aims to establishing a national strategy for and equitable economic growth and deliver more democratic and inclusive promoting usage and development quality education, achieve economic and institutions, better education, sustainable of ICTs and to transform Mexico into a gender equality and improve well-being. and inclusive economic growth, and to modern and well integrated information ensure Mexico’s role as a positive force in and knowledge society. the world. The plan involves five national

Summary of policies goals and three strategies.

MOBILE CAN SUPPORT THESE OBJECTIVES

Promote Promote digital Enhance economic The inclusion and productivity, Promote long- growth and development Support the growth of innovation, run economic enhance Education of e-health knowledge- and social growth productivity e-government based economy development and social cohesion Benefits of mobile services

By supporting a large Mobile services and By providing access to ecosystem of industries m-Government learning resources and and small businesses, initiatives contribute Increased access fostering information mobile services improve Increased broadband to administration to information sharing, mobile labour and capital access promotes job efficiency at local and promotes better health access can promote productivity, thus creation, economic national government education and health primary and secondary contributing to increase growth and innovation. levels, improving ease outcomes. education and increase economic growth, of doing business literacy rates. decrease poverty and and making FDI more How mobile can help How foster investment. attractive.

Source: Mexican government and Deloitte Figure 6

A report by ITU/Broadband Commission/Cisco found that mobile broadband may be more effective than fixed line in helping countries to deliver their national broadband plan. The report found that the introduction of a national broadband plan is associated with a 7.4% increase in mobile broadband penetration, compared to a 2.5% increase in fixed line broadband penetration on average30.

30. ITU/Broadband Commission/Cisco, 2013. Planning for progress: Why national broadband plans matter. 18 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

1.3 Current gaps in digital inclusion

Mobile makes an important contribution to socio-economic development and to the achievement of the government’s growth targets. Despite the digital inclusion that mobile has enabled, gaps in access to and availability of services remain.

The majority of Mexicans do not have a mobile connection. 62% of the population do not own mobile phones, leaving approximately 54 million adults with limited or no access to the benefits of even basic mobile phones31. Despite having the second largest economy in Latin America and the 6th highest GDP per capita, Mexico’s total mobile penetration rate in terms of unique subscribers is the lowest in Latin America and well below the OECD average32. Growth in connectivity has especially been slow since the 2009 financial crisis.33

Few Mexicans access mobile broadband services. Mexico’s mobile internet penetration rate is only 24% in terms of unique subscribers, which is the second lowest penetration rate in Latin America, well behind regional leaders like Chile and Argentina, at 49% and 48% respectively34. Even fewer Mexicans can access the benefits of higher-speed mobile broadband services; despite 3G coverage of 95%35 and rollout of 4G networks, uptake of mobile broadband services has remained limited. Currently, only 35% of mobile connections are 3G or 4G. Greater access to 3G and 4G would enable more Mexicans to access faster mobile broadband services and the greater economic benefits enabled by mobile broadband.

Mobile internet unique subscriber penetration in Latin America, Q1 2015

60%

50% 2G 3G+4G

40%

30%

20%

10%

0% Peru Chile Brazil Belize Bolivia Mexico Guyana Ecuador Panama Uruguay Colombia Paraguay Honduras Suriname Argentina Nicaragua Venezuela Costa Rica El Salvador Guatemala OECD-average French Guiana French

Source: GSMA Intelligence Database Figure 7

31. Assuming all subscribers are age 15 or over. Based on data on population by age group from the World Bank. 32. GSMA Intelligence database and Economist Intelligence Unit (EIU) – Telecommunications report Mexico. 33. GSMA Intelligence database, Q1 2015. There are 102 million total connections; the mobile penetration rate in terms of total connections is 82%. 34. GSMA Intelligence database, measured in terms of unique subscribers. 35. In terms of population covered. GSMA Intelligence database. 19 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

The rural poor and rural women are digitally excluded. Even though 2G and 3G coverage is widespread in Mexico, there are still gaps in coverage, and the rural poor and women are particularly prevented from accessing mobile services. There are 30 million people living in rural areas in Mexico, and around 4,000 communities, with a population of between 1,000 and 5,000 inhabitants, are not covered by mobile networks36. This contributes to a mobile penetration gap between urban and rural areas; for example, the North East region of Mexico had a penetration rate of 103% in 2014, compared to 72% in the less densely populated Gulf and South East region37. Although the overall gender gap in mobile ownership between men and women is relatively low in Mexico at 6%, there exists a considerable gap between men and women in rural areas. Rural women are 26% less likely to own a phone than men, compared to a mobile gender gap of only 2% in urban areas38. Service affordability problems may impact particularly on these groups as well, because rural populations and women have relatively lower incomes39.

Affordability barriers prevent many Mexicans from accessing mobile services

One issue contributing to these gaps in digital inclusion is the cost of mobile services and devices, which can act as a barrier to mobile access and usage.

Affordability of even basic devices is a particularly important issue for poorer Mexicans. The price of an average basic device accounts for 5.2% of annual income for the poorest 10% of households, and 2.9% of income for the second-poorest 10%.

36. EIU – Telecommunications Report Mexico, 1st Quarter 2015. 37. Subscriptions per 100 inhabitants for regions was drawn from http://siemt.ift.org.mx/. The North East region refers to Noreste and the Gulf and South region refers to the Golfo y Sur in Spanish. 38. GSMA – Bridging the gender gap: Mobile access and usage in low- and middle-income countries. 39. The gender wage gap was 15.4% in 2013, see OECD. Statextracts.

20 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

Affordability of mobile services and devices by income group (2012)

25% $45

$40

20% $35

$30 15% $25

$20 10% USD, thousands USD,

% of household income $15

$10 5%

$5

0% $0 1 2 3 4 5 6 7 8 9 10 (Poorest (Richest 10% of Household income decile group 10% of households) households)

Annual household income (USD$) Basic device cost (% of household income, left axis) Premium device cost (% of household income, left axis) Utility device cost (% of household income, left axis) Mobile broadband, postpaid 500 mb cost (% of household income) Mobile broadband, prepaid 500 mb cost (% of household income)

Source: Deloitte analysis based on income statistics from Instituto Nacional de Estadística y Geografía (INEGI), device prices from Gartner and mobile broadband prices from the ITU Measuring the Information Society 2013 Figure 8

Premium devices such as smartphones account for a substantial fraction of annual income for all but the richest 10% of households. The average price of a premium device accounts for over 5% of annual income for 60% of households, and up to 22.8% for the poorest.

In terms of usage, the cost of 500 MB of data for mobile broadband accounts for a substantial fraction of annual household income, at over 10% for the poorest 10% of households. As a result, for a large proportion of the population, access to enhanced mobile services through 3G/4G connections or smartphone is limited, preventing high-speed connectivity through mobile broadband.

21 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

Mexico has one of the lowest levels of smartphone adoption in Latin America, so improving device affordability – particularly for the poorest groups – could help bring access in line with regional leaders.

Smartphone adoption rates in selected markets, Q1 2015

60%

50%

40%

30%

20%

10%

0% Peru Chile Brazil Belize Bolivia Mexico Guyana Ecuador Average Panama Uruguay Colombia Paraguay Honduras Suriname Argentina Nicaragua Venezuela Costa Rica El Salvador Guatemala French Guiana French

Source: GSMA Latin America Mobile Economy 2014 Figure 9

Affordability of mobile services and devices is especially important in Mexico because fixed line services are characterised by high prices,40 making mobile the most affordable means of connectivity. In a report by the ITU that measures the cost and affordability of ICT services, it was found that the price of a representative fixed telephone basket cost 2.27% of gross national income (GNI) per capita compared to 1.4% of GNI for the mobile basket41.

Mexico has high levels of poverty and income inequality, as well as a high rural population concentration, and so affordability is an important consideration, in particular for the rural population. According to World Bank statistics, over 52% of the population were below the national poverty line in 2013, compared to nearly 64% of the rural population. In addition, economic inequality in Mexico, as measured by the Gini-coefficient, was the fifth highest in Latin America in 201242.

40. OECD (2012): “OECD Review of telecommunication policy and regulation in Mexico”. 41. ITU – Measuring the Information Society, 2014. 42. World Bank Development Indicators. Data was available for 11 countries in Latin America – in order of decreasing economic inequality, these are Colombia, Brazil, Panama, Costa Rica, Mexico, Paraguay, Bolivia, Ecuador, Peru, El Salvador, and Uruguay.

22 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

Analysis of how mobile usage has responded to decreases in prices for airtime shows that Mexican consumers are very sensitive to prices. This suggests that continued improvements in affordability could help boost digital inclusion.

Airtime prices and minutes of use in Mexico

$0.20 70

$0.18 60 $0.16

$0.14 50

$0.12 40 $0.10 30 $0.08 Price per minute (USD) per minute Price Minutes of use (billions) Minutes $0.06 20 $0.04 10 $0.02

$0.00 0 Q4 2011 Q4 2012 Q4 2014 Q4 2013 Q4 2001 Q4 2010 Q4 2007 Q4 2002 Q4 2004 Q4 2003 Q4 2005 Q4 2000 Q4 2006 Q4 2008 Q4 2009

Effective price per minute – Market average Minutes of use – Telcel

Source: GSMA Intelligence database Figure 10

23 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

Investment in Mexico’s network and services is required

Closing the gaps in digital inclusion also requires addressing the critical need for greater network investment. Investment in mobile networks is crucial because of the relatively limited coverage of fixed lines in Mexico. Investment in improved capacity is also required to ensure quality of service and to provide bandwidth for mobile data services, particularly as demand for mobile data increases over time. Currently, the average mobile data download speed of 8.6 Mbps is slightly above the regional average of 8.5 Mbps but lags far behind regional leader Uruguay and the global average, as shown below.

Mobile data download speed, 2015 (Mbps)

18

16

14

12

10

8

6

4

2

0 Peru Chile Brazil Bolivia Mexico Panama Ecuador Uruguay Colombia Paraguay Honduras Argentina Nicaragua Venezuela Costa Rica El Salvador Guatemala Global average Dominican Republic

Source: Netindex.com. Accessed 17 June 2015. Figure 11

Network infrastructure investment is lagging behind neighbouring countries and countries at a similar level of development. Mexico has the lowest level of mobile investment per capita among the OECD countries43. Data from Mexico demonstrates that the trend of FDI inflows to the telecoms sector has declined in absolute terms as well as relative to total FDI since 2001. Low levels of investment may contribute to low coverage, particularly in rural areas where network expansion is more expensive, as well to reduced quality of service.

43. Economist Intelligence Unit (EIU) – Telecommunications report Mexico and OECD (2012): “OECD Review of telecommunication policy and regulation in Mexico”.

24 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

Telecoms FDI inflows in Mexico

$4.0 16%

$3.5 14%

$3.0 12%

$2.5 10%

$2.0 8%

$1.5 6% % of total FDI % of total FDI (USD billions)

$1.0 4%

$0.5 2%

$0.0 0%

-$0.5 -2% 2011 2012 2001 2010 2007 2002 2004 2003 2005 2006 2008 2009

Telecoms FDI (USD bn, left axis) Telecoms % of total FDI (right axis)

Source: Deloitte analysis based on OECD StatExtracts Figure 12

Mobile investment is limited by a number of policy barriers. In 2012, the OECD identified barriers to competition and provision of capacity as the two key challenges to telecommunications infrastructure investment in Mexico. In particular, infrastructure sharing is prevented by a lengthy permit process, the need to request rights of way, and a lack of passive infrastructure sharing requirement44.

Operators are relatively restricted in their ability to invest in mobile networks and in the quality of service they can offer because of the limited spectrum allocated to them. According to GSMA Mexico has the fourth lowest total amount of spectrum allocated to operators in Latin America, and those countries with less spectrum allocated are significantly smaller both in terms of population and geographic area. Mexico also has a low amount of spectrum relative to population in Latin America, with just 1.68 MHz per million people compared to the regional average of 24 MHz per million people45.

44. OECD (2012): “OECD Review of telecommunication policy and regulation in Mexico”. 45. GSMA Latin America Mobile Economy 2014 and GSMA Intelligence database.

25 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

Total MHz licensed to mobile operators, December 2014

700

600 180 2G/3G 4G

500 454 200 400 190 180 300 120 40 24 40 0 60 80 250 84 250 80 0 0 200 225 240 235 238 215 202 220 60 210 204 170 170 170 150 70 100 100

0 Peru Chile Brazil Bolivia Mexico Ecuador Uruguay Colombia Paraguay Honduras Argentina Nicaragua Venezuela Costa Rica El Salvador Guatemala Dom. Republic

Source: GSMA Latin America Mobile Economy 2014 Figure 13

Amount of mobile spectrum per million people in selected Latin American countries where data is available, December 2014

100

90

80

70

60

50

40 MHz per million people 30

20

10

0 Peru Chile Brazil Bolivia Mexico Ecuador Average Uruguay Colombia Paraguay Honduras Argentina Nicaragua Venezuela Costa Rica Guatemala

Source: GSMA Latin America Mobile Economy 2014 and GSMA Intelligence database. Figure 14

26 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

1.4 Policy reforms and the future of mobile

A 2012 report by the OECD46 highlighted the licences and other regulatory powers to promote importance of regulatory reform in boosting competition, such as regulating prices and the sector’s socio-economic contribution. The imposing fines48. Investors anticipate that by study found that across the telecommunication regulating the telecommunications sector in sector as a whole (including fixed, mobile and a single law covering services, networks and broadcasting industries), Mexico experienced spectrum, the updated legal framework will an annual welfare loss of 1.8% of GDP per provide better regulatory certainty. annum, at a cost of USD 129.2 billion between 2005 and 2009. Public-private partnership network infrastructure: The key issues identified by the OECD contributing to this welfare loss were: The government is planning to launch a public- private partnership wholesale mobile network • High barriers to entry, and in fixed in 2018. The network is intended to be made telecommunications, restrictions on foreign available to all operators and therefore limit the investments; need for operators to build their own network • A need for regulatory reform to ensure that infrastructure and make it easier for new firms to regulations and regulatory processes are enter the market49. transparent, non-discriminatory, and effective; • A need for the regulator to have greater “Universal digital inclusion” policy: independence in carrying out its mandate; and • A need for regulatory reform in order to The federal government adopted a policy aimed promote competition. at promoting broad use of digital technology by developing infrastructure, access and high-speed The Mexican government has recently introduced connectivity. a series of regulatory and policy reforms that are intended to address these issues. Constitutional amendments were passed in 2013 to introduce As a result of these changes, new regulations wide-ranging reforms to the telecommunications have been introduced in the mobile market: sector in Mexico, with the goal of increasing several wholesale services (mobile call investments and the competitiveness of the termination, SMS termination, national sector. These reforms have three pillars – national roaming, and MVNO access) are now subject coverage, competitive prices and quality of to regulation and will be subject to lower rates, service47. The reforms involve substantial changes national long-distance telephony tariffs will to the mobile market, including: be removed, carriers will have to compensate users for service failures, infrastructure sharing Regulatory changes: is enforced, and mobile phones will be sold unblocked50. These regulations are intended to The Federal Telecommunications Institute (Ifetel) result in lower usage prices for consumers and replaced the previous telecommunications to provide mobile operators with incentives to regulatory authority Cofetel, and is tasked with increase service quality. If successful, the reforms ensuring competition in the sector. Its powers have the potential to increase subscription, include: regulation and competition enforcement usage and economic growth51. However, there in the telecommunications and media industries, is considerable debate over aspects of these granting of telecommunication and broadcasting reforms52.

46. OECD (2012): “OECD Review of telecommunication policy and regulation in Mexico”. 47. PWC – Telecommunications sector: Nordic investment in Mexico, 2014. 48. PWC – Telecommunications sector: Nordic investment in Mexico, 2014 and OECD – Economic Surveys Mexico, 2015. 49. PWC – Telecommunications sector: Nordic investment in Mexico, 2014 and Economist Intelligence Unit (EIU) – Telecommunications report Mexico. 50. PWC, Telecommunications sector: Nordic investment in Mexico, 2014. 51. IMF, Article IV Consultation – Staff report; and Press Release, 2014. 52. See, e.g. GSMA Press Release, GSMA Report Favours Competition Over Single Wholesale Networks, 2014, and Frontier/GSMA, Assessing the Case for Single Wholesale Networks in mobile communications, 2014. 27 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

1.5 Assessing the impact of taxation on digital inclusion in Mexico

Section 1.3 identified considerable potential taxed equally to other goods, in a way that for growth, in particular in the market for promotes economic growth and protects mobile broadband. In order for Mexico to the government’s tax revenue position in the realise the full benefits of mobile services medium term. and to promote sustainable and long-term economic growth, further steps need to • Section 2 describes the taxes levied on be taken to promote digital inclusion and the mobile sector in Mexico, and the extend access to mobile services to the implications of these taxes for the mobile remainder of the population. sector and the wider economy. It also compares the taxes levied in Mexico The telecommunications reform package with international benchmarks and with has the ambitious goal of improving digital best practice on taxation principles as inclusion and helping more people to gain recommended by leading international access to mobile services. However, the issue organisations. of mobile-specific taxation is one barrier not addressed by these reforms. Previous • Section 3 provides a number of case Deloitte studies on mobile taxation suggest studies that demonstrate how mobile that increases in tax rates in Mexico were taxation changes have impacted sector followed by declining mobile penetration growth internationally. as poorer segments of the population were priced out of the market53. Declining • Section 4 considers effective alternatives penetration would have negative impacts for rebalancing taxes on the mobile on the wider economy: increased mobile sector. These policies can support the penetration and data usage has been Mexican government’s goal of digital demonstrated to have positive effects on and financial inclusion, while increasing economies and the growth rate of GDP per economic growth and productivity. capita54. Further, there is evidence that lower taxes may increase telecom investment and • Section 5 concludes, illustrating the broadband adoption, and deliver increased contribution to fiscal stability of the tax revenues and GDP55. To realise the full policies presented in Section 4 and economic potential of mobile connectivity, presents guidelines to align mobile it is important that the issue of tax is not taxation to standard goods taxation. overlooked. • The Appendix describes the economic The rest of this report assesses how mobile model of the Mexican mobile sector taxation impacts on digital inclusion and economy that has been used in and how addressing mobile-specific the analysis to estimate the impacts of taxation could be complementary to the rebalancing mobile sector taxes. government’s current reforms. It utilises an economic model of the Mexican mobile sector and economy and suggests a number of options for the government to transition to a tax structure where mobile is

53. Deloitte, Mobile telephony and taxation in Latin America, 2012. 54. See GSMA/Deloitte/Cisco (2012): “What is the impact of mobile telephony on economic growth?” It is estimated that a 10% substitution from 2G to 3G penetration increases GDP per capita growth by 0.65% for Mexico, and a doubling in data usage per user would increase GDP per capita growth by 0.36%. 55. Katz, R., 2014. The impact of taxation in the supply of and demand of broadband services. Presentation to the Intel Latin America Broadband and USF Leaders forum, Guadalajara, Mexico. 28 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

Taxation on the mobile 2 sector in Mexico

The Mexican mobile sector is subject to a set of taxes levied both on operators and consumers. The extent to which these charges ultimately fall on operators or consumers depends on the type of tax and market conditions. Some taxes and fees may be absorbed by operators in the form of lower profits, whilst others may be passed through in terms of higher prices for consumers, or a combination of the two.

This section reviews the taxes applied to mobile consumers and operators in Mexico, focusing on those that are mobile-specific, i.e. those which do not apply to other goods in the economy. It also compares the mobile taxation system with similar countries and with other Mexican industries.

2.1 Taxes on mobile consumers in Mexico

Consumer taxes in Mexico apply to devices, usage of services, SIM cards and mobile broadband. In addition to standard taxation, some mobile services are subject to the mobile- specific IEPS tax applied ad valorem on the value of the service.

Consumer taxes on mobile devices and services in Mexico

PAYMENT BASE TYPE TAX RATE

Devices VAT 16%

Activation/SIM cards, Calls, SMS VAT 16%

Calls and SMS IEPS 3%

Mobile Broadband VAT 16%

Source: International Bureau of Fiscal Documentation (IBFD) and mobile operator data Table 2

29 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

The VAT on mobile devices and services

All mobile services, including calls, SMS, mobile broadband, m-Money and devices are subject to the standard VAT rate of 16%. The VAT rate was increased from 15% to 16% in 2010, above the regional average of 14%. Previously, regions bordering the USA were subjected to a lower VAT of 11%, but this lower rate was eliminated in 201356.

The IEPS on mobile services

A mobile-specific tax is applied to mobile calls and SMS. The IEPS is a special tax on production and services that is levied on certain goods and services such as sales of alcoholic beverages, tobacco, gasoline, diesel, gambling and betting, and telecommunication services57. The IEPS tax was extended to include mobile services in 2010 and is levied at a rate of 3%.

The IEPS tax was criticised by the OECD in its Review of Telecommunications Policy and Regulation in Mexico, stating that “It is difficult to justify a specific sectoral tax, such as the IEPS, as it places a needless burden on the telecommunications industry unless used to support the sector in some form (universal service, the regulator, etc.).” 58

The IEPS could potentially have distortive effects on the consumption of mobile services:

• It can potentially reduce demand for mobile services, slowing the growth of the sector. Taxes on consumers can be particularly distortionary when they are mobile-specific, as is the case of the IEPS, in contrast with broad-based taxes.

• By adding to the final prices of mobile services, it has the potential to create affordability barriers that may constrain usage and take-up of new services such as mobile broadband.

Taxation in Mexico accounts for a significant proportion of the total cost of purchasing and using a mobile phone for the average consumer. Total taxes on consumers, including VAT and the IEPS, were found to account for 18.9% of the Total Cost of Mobile Ownership (TCMO) in Mexico in 201459.

In an international study by McKinsey on barriers to internet adoption, Mexico ranked in the third quartile on the sub-index “Low incomes and affordability”, indicating that affordability issues pose high barriers to internet adoption60.

56. Deloitte – Taxation and investment in Mexico 2014. 57. KPMG – Investment in Mexico, 2012 and Anatel, 2012. Telecomunicaciones e Impuestos: Incentivos fiscales para su desarrollo. 58. OECD (2012): “OECD Review of telecommunication policy and regulation in Mexico”. 59. GSMA/Deloitte, Digital Inclusion and Mobile Sector Taxation, forthcoming. 60. McKinsey&Company, 2014. Offline and falling behind: Barriers to internet adoption.

30 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

International “Low incomes and affordability” sub-index 2014

100 Top quartile Second quartile Third quartile Forth quartile

90

80

70

60

50

40

30

20

10

0 Italy India Spain Brazil China Egypt Japan Turkey Russia Mexico Nigeria Vietnam Ethiopia Thailand Pakistan Tanzania Germany Sri Lanka Colombia Indonesia Philippines Bangladesh South Korea South Africa United States United

Source: McKinsey&Company, 2014: “Offline and falling behind: Barriers to internet adoption” Figure 15

2.2 Taxes and fees levied on mobile operators in Mexico

Mobile operators in Mexico are subject to general taxes such as the corporation tax, customs duties and customs processing fees. Additionally, operators may subsidise part of the taxes that are applied to consumers in order to improve affordability and expand market demand. Operators are subject to various regulatory fees, including both annual and non- recurring fees.

31 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

Taxes and fees levied on mobile operators in Mexico

PAYMENT BASE TYPE TAX RATE

VAT 16%

Imported network equipment

Customs duty 0-15%

Customs processing fee 0.8% Taxes

VAT 16% Imported SIM cards and vouchers Customs processing fee 0.8%

Profits Corporation tax 30%

Fixed amount per MHz based on Annual spectrum fee band & coverage

Flat fees One-time licence fee Varies

Regulatory fees Regulatory One-time spectrum fee Varies

Source: IBFD and operator data Figure 16

General taxation on mobile operators

A corporation tax is applied on incomes derived by Mexican resident companies. The rate of the corporation tax in Mexico is 30%, the 6th highest rate in Latin America61. The corporation tax rate was raised from 28% to 30% in 2010 and was set to be reduced to 29% in 2013 and 28% in 2014, although this rate decrease has not been put in place62.

Mobile operators pay the standard VAT rate of 16% on imported network equipment as well as SIM cards and vouchers. A customs processing fee of 0.8% is also levied on imports. While most of the network equipment imports are exempt from customs duties, mobile operators are required to pay customs duties on selected network equipment.

61. IBFD. 62. Based on discussions with operators. 32 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

Customs duty rates levied on network equipment

NETWORK EQUIPMENT TAX RATE

Ultra-high frequency reception apparatuses 5% (300-570 MHz)

Ultra-high modulated frequency reception apparatuses 15%

Super-high frequency or microwave (over 1GHz) 15% reception apparatuses

Reception apparatuses for 26.2-27.5 MHz frequencies 15%

Source: GSMA/Deloitte – Mobile telephony and taxation in Latin America, 2012. Table 3

Mobile-specific fees on mobile operators

Operators pay a number of different regulatory fees to the Ministry for Communications and Transport (SCT), which include recurring and non-recurring spectrum and licence fees.

Recurring spectrum and licence fees Mobile operators are subject to recurring spectrum fees, which represent a significant part of operators’ payments. These are intended to cover the costs of spectrum management and ensure the efficient use of spectrum63. A flat fee is paid annually in spectrum fees. The fee is determined per MHz based on band and coverage. In 2014, the mobile operators in Mexico are estimated to have paid over USD 484 million in annual spectrum fees, circa 11% of all taxes and fees paid64.

A significant portion of operators’ revenue is contributed to the government through recurring regulatory fees, and this contribution is amongst the highest globally. The share of operators’ revenues spent on regulatory fees in Mexico is the third highest amongst 26 countries for which data were available.

63 ITU, ICT Regulation Toolkit, http://www.ictregulationtoolkit.org/5.5. 64 Deloitte analysis based on operator data. 33 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

Recurring regulatory fees as a percentage of revenues

100

90

80

70

60

50

40 MHz per million people 30

20

10

0 Peru Chile Brazil Bolivia Mexico Ecuador Average Uruguay Colombia Paraguay Honduras Argentina Nicaragua Venezuela Costa Rica Guatemala

Source: Deloitte analysis based on Mexican operator data for 2014 and GSMA/Deloitte (2015): “Digital inclusion and mobile sector taxation” which uses 2013 data Figure 17

Non-recurring spectrum and licence fees In addition to annual fees, operators pay non-recurring fees in order to be licensed to provide services and to acquire spectrum. Operators paid a combined amount of MXN 41.49 billion65 in 2010 for 3G licenses in the 1.9GHz spectrum for the 20 years duration of the licences: Telcel paid MXN 16.49 billion for 21 spectrum blocks of 10MHz each, Movistar paid MXN 6.7 billion for six spectrum blocks of 10MHz each and Nextel/Televisa paid MXN 18.3 for a single 30MHz block66. In 2012 the regulator decided against renewing a number of licences in the 2.5GHz spectrum and instead reassigned the spectrum for 4G/LTE usage, upon which Telcel and Movistar launched commercial LTE services in October and November respectively the same year67. 4G spectrum auctions are planned to be held in 201568.

Total recurring mobile tax and fee payments in Mexico

As a result of these taxes and fees, the total recurring payments paid by Mexican operators and consumers represent 27% of market revenues. This excludes the one-off fees that mobile operators paid for spectrum and licences in order to provide services; if these were included, the total tax burden measurement would be higher.

65. Buddecomm – Mexico: mobile market insights, statistics and forecast, 2015. Equivalent to circa USD 236 million. 66. Buddecomm – Mexico: mobile market insights, statistics and forecast, 2015. 67. Buddecomm – Mexico: mobile market insights, statistics and forecast, 2015. 68. http://www.developingtelecoms.com/business/regulation/5642-mexico-approves-iusacell-acquisition-confirms-4g-auctions.html. 34 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

Mobile taxation on operators and the impact on investment

These taxes could potentially have distortive effects on the investment decisions of mobile operators. Taxes and fees represent the largest category of expenditure to mobile operators and are a key determinant of investment in the sector. Taxes could reduce incentives to invest, thus delaying network upgrades and rollouts, and create distortions across industries.

There are indications that mobile investment in Mexico is lower compared to other Latin American countries. Almost every year since 2005, investment in mobile telecommunications has represented a smaller share of national GDP than the Latin American average69.

2.3 Best practice in taxation policy

An effective tax policy has to balance a number of potentially competing factors. These include the government’s revenue needs, supporting key sectors and the practicalities of enforcement and collection, as well as the desire to minimise any detrimental impact on the wider economy. Consequently tax policy frequently must strike a balance between the theoretically correct response and one that recognises the practicalities of taxation in a market70.

There are however a number of principles that are generally recognised as contributing to an effective tax system and if applied in Mexico, these principles have the potential to expand investment in the mobile sector and lead to significant economic growth and increased tax revenues for the government. The following principles have been indicated by organisations such as the IMF:

1. In general, taxation should be broad-based: Taxation alters incentives for production and consumption, and so economic distortions will generally be minimised where the burden of taxation is spread evenly across the economy. In practice this equates to adopting broadly defined bases for taxation, limiting rate variations and effectively enforcing tax compliance.

2. Taxes should account for sector and product externalities: The case for taxation to address negative externalities71 (such as those arising from tobacco consumption) is recognised. The same logic also applies to sectors and products with positive externalities. Taxation policy should encourage sectors, such as mobile, that create positive externalities in the wider economy. Higher taxation on mobile may discourage consumption of mobile services and prevent the realisation of the positive spillovers from the sector.

3. The tax and regulatory system should be simple, easily understandable and enforceable: Uncertainty and lack of transparency over taxation systems and liabilities may deter investors and are also likely to increase enforcement costs for government.

4. Dynamic incentives for the operators should be unaffected: Taxation should not disincentivise efficient investment or competition in the ICT sector. In situations where the tax system does provide disincentives, tax revenue could be significantly reduced in the long run.

69. Economist Intelligence Unit. Other countries include Argentina, Brazil, Chile, Colombia and Peru. 70. IMF, Tax policy for developing countries, 2001. 71. An externality refers to an impact on the wider economy that is not accounted for by the consumer purchasing the good. For example, consumers of tobacco create an additional cost for others through second-hand smoke, but do not take into account this impact when choosing whether to smoke. 35 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

5. In addition, it is widely accepted that taxes should be equitable, and that the burden of taxation should not fall disproportionately on the poorer members of society.

6. Spectrum prices and other regulatory fees should cover the cost of spectrum management and reflect the rent associated with this scarce resource. At the same time, they should maintain the incentives to invest, by appropriately incorporating all costs incurred during the duration of a licence, including taxes72.

In addition to general and specific taxes levied on the mobile sector, spectrum and licence fees are intended to correct the externalities related to the use of these scarce resources and cover the costs related to spectrum management, while at the same time maintaining the incentives on investment. In particular, these fees should achieve the following objectives73:

• Cover the costs of spectrum management. • Ensure the efficient use of the spectrum scarce resource by ensuring sufficient incentives are in place. • Maximise the economic benefits to society obtained from telecommunication services. • Ensure that users benefiting from the use of the spectrum resource pay for the cost of using spectrum.

These principles are intended to minimise the inefficiencies associated with taxation and regulatory fees and the distortive impacts that they may have on the wider economy. The table below summarises how the taxes and fees levied in Mexico align with these principles.

Alignment of taxes and regulatory fees on the mobile sector in Mexico with the principles of taxation

Incentives for Accounts for Transparent competition Equitable Tax Broad-based externalities and and (not regressive) enforceable investment

Corporation tax

VAT

IEPS

Customs Duty

Customs Processing fee

Licence fee

Spectrum fee

Source: Deloitte analysis Table 4

72. ITU, ICT regulation toolkit, 2014. 36 73. ITU, ICT Regulation Toolkit, http://www.ictregulationtoolkit.org/5.5. DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

As shown in the table above, many of the Efficient, equitable and stable pricing of taxes levied on the mobile sector in Mexico spectrum and licence fees could incentivise do not appear to fully align with these key the development of new technologies and principles of efficient taxation, which has encourage mobile operators to invest in ramifications for the development of the new spectrum and network roll-out, while sector and the wider economy. In particular, covering the cost of spectrum management, those taxes that are mobile-specific have ensuring efficient use of spectrum and the highest negative impact and lack of providing a source of revenue to the alignment with the established principles government. of taxation: VAT is levied on international roaming: Mobile-specific taxes such as the IEPS Currently, VAT is applied when Mexican increase barriers to access and hit the consumers use their phones to roam poorest consumers hardest: Mexican mobile internationally, potentially subjecting them consumers are subject to mobile-specific to multiple taxation and raising costs74. This taxes, in the form of the IEPS on calls and is out of line with international precedent, SMS. This tax is not broad-based, as it is as international roaming is typically treated specific to mobile services and a limited as exports and are exempt from VAT. For number of “luxury” goods and services, and example, in the UK, VAT has not been applied as such may create distortions in consumers’ on roaming outside of the EU since 199275. purchasing decisions. By increasing the final price of mobile services, it creates a barrier to affordability and to mobile access. This The potential inefficiencies created by these barrier is greater for low income consumers various mobile taxation issues may not and therefore risks excluding them from the only limit the development of the mobile benefits of mobile and the internet. sector, but also hinder economic growth and the realisation of the positive externalities All mobile-specific taxes and fees fail created by mobile services. In the medium to account for positive externalities and term, the Mexican government has the discourage consumption: In addition to IEPS, potential to generate more tax revenue by mobile is subject to a number of sector- complementing the wider sector reforms specific regulatory fees. Mobile has positive that are currently being implemented with impacts in the wider economy through a transition towards a more equitable and positive spillover effects and facilitation of balanced taxation structure that treats innovation and productivity in other sectors mobile equally to other industries. such as agriculture, healthcare and education. Taxing mobile in a disproportionate manner Economic theory suggests that there exists would discourage rather than encourage an optimal level of taxation which will consumption. maximise government revenues, so that if at any point taxation is excessive, it will be High spectrum and other regulatory beneficial for government policymakers to fees could distort operators’ investment reduce the burden of taxation in order to decisions: Regulatory fees represent a widen the tax base. significant part of operators’ tax and fee payments and are a key determinant of At low levels of taxation, buyers and sellers investment in the sector. They could reduce may not be substantially affected by the incentives to invest and create distortions change in price. At high levels of taxation across industries. Moreover, fees that are however, buyers and sellers may substitute subject to frequent changes increase away from a given good or service. At a high uncertainty and discourage investment level of taxation, it may be optimal to reduce both domestically and internationally. taxes to increase tax revenue.

74. Anatel, 2012. Telecomunicaciones e Impuestos: Incentivos fiscales para su desarrollo. 75. http://www.moneysavingexpert.com/news/phones/2015/01/ee-refunds-1m-after-mistakenly-charging-vat-on-non-eu-data. 37 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

Case studies: 3 impacts of mobile taxation changes

Tax increases in other countries have been associated with decreases in mobile usage and investment. The example below illustrates the impacts that changes in mobile sector taxation can have on usage and other relevant variables.

Case study:

INCREASED MOBILE-SPECIFIC TAXATION AFFECTED INVESTMENT AND USAGE IN CROATIA

After years of growth, Croatia suffered from a recession in 2009 following the global financial crisis. In addition to the direct impact of the recessionary environment on the mobile industry, in June 2009 the Government introduced a 6% tax on mobile operators’ gross revenue from mobile calls and SMS.

Following the introduction of this tax, the tax pressure on mobile increased to 28% of the cost of mobile ownership, the highest at the time in EuropeI. During the same period:

• Volumes of mobile calls and SMS decreased in 2010 by 4% and 14% respectively. • Mobile-specific taxation as a proportion of mobile operators’ revenue increased significantly after 2008. The total tax burden on mobile grew by 2% in 2009 and by 10% in 2010. • Reductions in operator revenues led to decreases in mobile operator capital expenditureII.

The Croatian government removed the 6% tax on calls and SMS in 2012. Mobile operator capital expenditure increased by 5% between 2012 and 2013.

I Deloitte/GSMA, Mobile Taxes and Fees: A toolkit of principles and evidence, 2014. II GSMA Intelligence Database.

However, countries worldwide have started to recognise the upside of an equitable and balanced taxation on the mobile sector and the potential to improve affordability and unlock digital inclusion, as illustrated by the examples below.

38 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

Case study:

REDUCTION OF SIM TAXES ON CELLULAR M2M SERVICES IN TURKEY AND BRAZIL

In July 2012, M2M SIM cards were exempted from the TRY 37 connections tax that applies to standard SIM cards in TurkeyI. Prior to the tax exemption, mobile operators in Turkey had identified the connection tax as one of the biggest obstacles to growth in the cellular M2M market due to the low ARPU of these servicesII, which would otherwise present considerable potential for growthIII.

The number of cellular M2M connections in Turkey increased from 1.3 million in March 2012 before the tax exemption to 2.1 million connections in December 2013. This represents an overall increase of 25% in cellular M2M connectionsIV.

Cellular M2M market growth in Turkey

3.0% 2,500

2.5% 2,000

2.0% 1,500

1.5%

1,000

1.0% (Thousands) Cellular M2M penetration Cellular M2M connections Cellular 500 0.5%

0.0% 0 Q1 2012 Q1 2013 Q2 2012 Q4 2012 Q3 2012 Q2 2013 Q4 2013 Q3 2013

Source: GSMA Intelligence Database and Deloitte analysis

Similarly, recognising the tax pressure on cellular M2M services in BrazilVI, the Brazilian government decided to introduce tax reductions on M2M SIM over the time period 2012- 2014. The reductions were approved in 2012VII and came into effect in April 2014VIII. The SIM card tax for new connections was reduced from BRL28.63 (USD 11.56) to BRL5.68 (USD 2.29) for M2M SIM and the annual connection tax was lowered from BRL 8.94 (USD 3.61) to BRL1.89 (USD 0.76)IX. This equates to a combined reduction of 80 per centX.

The tax cut is likely to have a significant positive impact on the development of the Brazilian cellular M2M market, providing a positive stimulus for mobile operators to develop these services. Shortly after the tax cut was enacted, mobile operators invested BRL 13 billion (USD 6 billion) in development of M2M servicesXI.The Brazilian Communications Minister estimates that as a result of the tax cut the number of M2M devices in Brazil will increase by 33%, from 17.5m to 23.3m in 2016XII.

I Mobile Marketing Magazine, July 16th 2012, “Turkey lifts SIM tax”. II Wall Street Journal, March 21st 2011, “Turkcell targets smartphones as key to growth”. II Ibid. IV GSMA Intelligence Database. VI TechPolis, July 23rd 2013, “The take-off of M2M in Brazil”. VII Ibid. VIII GSMA, May 9th 2014, “GSMA welcomes Brazilian government decision to reduce machine-to-machine taxation”. IX GSMA, 2014, “The Mobile Economy Latin America 2014”. X GSMA, May 9th 2014, “GSMA welcomes Brazilian government decision to reduce machine-to-machine taxation”. XI TelecomEngine, May 7th 2014, “Brazilian operators invest USD 6 billion in M2M”. XII Telefonica, June 4th 2014,”Brazil tax reductions: A movement to the leadership”. 39 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

Case study:

REDUCED AIRTIME TAXATION IN URUGUAY

In 2007, the Uruguayan government abolished an airtime tax that had accounted for between 30 and 50% of calling costsI.

In the year immediately following, prices fell by over two thirds from UYU 3.75 per minute to around UYU 1.00 per minute. Penetration more than doubled from 65% in 2006 to 141% in 2011. Alongside increased penetration, mobile usage rose from just under 400 annual minutes per subscriber in 2006 to 1,600 in 2011II. This contrasts to Brazil where taxes remained considerably higher and minutes of use per subscriber were less than 1,000 in 2011.III

Increase in mobile usage per subscriber and decrease in prices following removal of an airtime tax in Uruguay

1800 4

1600 3.5

1400 3

1200 2.5 1000 2 800 1.5

600 (UYU) per minute Price MOU per subscriber year 1 400

200 0.5

0 0 2011 2010 2007 2006 2008 2009

MOU per subscriber per year Price per Minute (UYU)

Source: GSMA/Deloitte 2012

I I GSMA/Deloitte (2012): “Mobile telephony and taxation in Latin America” II GSMA, Taxation of mobile telecoms: Sector-specific taxes on consumption and international traffic, 2012. III Deloitte, ‘Mobile telephony and taxation in Kenya, 2011.

40 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

Economic impacts 4 of reforming mobile taxation in Mexico

This section discusses the impacts of reforming taxation through three tax policy changes, using a combination of qualitative evidence and a quantitative model of the mobile sector and its impact on the wider economy in Mexico. After discussions with Mexican operators, the quantitative impacts for the following alternatives of tax reform are estimated:

• Reduction of the IEPS on mobile services from 3% to 1.5%. • Abolition of the IEPS on mobile services. • Reduction of annual regulatory fee payments by 10%.

4.1 How mobile taxation in Mexico impacts the economy

The IEPS and regulatory fees are mobile-specific taxes that put the mobile industry at a competitive disadvantage with respect to other industries, potentially reducing investment and failing to recognise the positive spillovers of mobile.

By reforming mobile taxation and transitioning to a more balanced taxation structure where mobile is taxed equally to standard goods and services, the government of Mexico can complement its current reform programme and further its National Development Plan and National Digital Strategy of promoting usage and development of ICT and transforming Mexico into a knowledge-based society, while potentially benefitting from increased tax revenues in the medium term as a result of GDP growth.

To estimate the quantitative impacts of tax reform, an economic model of the Mexican economy and mobile sector was constructed, using sector-specific data from the GSMA and mobile operators in Mexico, together with macroeconomic data from the IMF and World Bank. This allows the model to represent both the mobile sector and its impacts on the economy as a whole. This approach also enables comparison between a base case that uses current projections for the sector and several tax reduction scenarios; other potential impacts on the sector that may arise from the government’s current reform programme are not explicitly modelled but may have been considered in projections by the GSMA or third party sources and may therefore have been taken into account in the base case.

The figure below illustrates the impacts of tax reform on key economic and sector variables.

41 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

SCHEMATICS FOR MODELLING THE ECONOMIC IMPACTS OF MOBILE TAXATION CHANGES

Sector impacts

REVENUE EMPLOYMENT CONSUMPTION OF FROM MOBILE BY OPERATORS 1 2 MOBILE SERVICES SERVICES PRICE OF 3 TAX AND FEE MOBILE PROFITABILITY OF INVESTMENT TAXES AND PROPOSAL SERVICES MOBILE SERVICES FEE PAYMENTS PASS-THROUGH PRICE ELASTICITY OF DEMAND A percentage of the tax and across di­erent groups of Changes in prices and consumption lead to a new fee payments is reflected in the consumers determines the level of revenue generated from mobile services. retail price of mobile services. impact of change in price on Tax and fee payments and labour demand will consumption. also adjust accordingly. Changes in profitability will influence the level of investment.

Economy-wide impacts 4 MULTIPLIERS 5 ESTIMATES

CORE IMPACTS SPILL-OVER IMPACTS

REAL GDP TAX REVENUE PRODUCTIVITY GROWTH

MOBILE EMPLOYMENT INEQUALITY INVESTMENT PENETRATION

Direct impacts are extrapolated onto the Other metrics use concepts well-developed in research, economy using multiplier factors, adjusted for including previous GSMA/Deloitte work on the impact of the size of the country and market structure. penetration on economic growth, to quantify spill-over e­ects.

Source: GSMA analysis Figure 18

The modelling involves several steps which encompass the impacts outlined in the figure above:

The levies, fees, and royalties applied The price of mobile services 1 to the mobile sector are reflected 2 determines the demand and therefore in the retail prices mobile operators the aggregate consumption of mobile charge for using their services. services. The price elasticity of A reduction of such payments to demand describes the responsiveness government will lead to a reduction in of demand to a change in the price the retail price of the mobile service and is calculated as the percentage according to an assumed pass- change in demand resulting from a through rate. A pass-through rate given percentage change in price. represents what percentage of the levy and fee payments are reflected in the retail price of mobile services.

42 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

Changes in the level of consumption An elasticity determines the impact of mobile services lead to a new level of a change in mobile penetration 3 of revenue generated by operators, 5 on GDP growth. Multipliers are which changes the level of taxes and assumed which allow changes fee payments and labour demand in mobile sector employment to accordingly. affect the wider Mexican labour force. Productivity is calculated These changes to the mobile sector using the total factor productivity lead to direct impacts on value-add impact, described in the appendix. 4 and employment and, through spill over effects, on the wider economy, in particular on real GDP, tax revenues, employment and investment.

4.2 Reducing the IEPS on mobile services to 1.5%

The IEPS currently applied on calls and SMS at 3% results in an increase in the cost of accessing and using mobile services and a constraint on the overall mobile penetration and the range of uses. It is estimated that reducing the IEPS on mobile services to 1.5% could potentially drive the following impacts:

Potential impact of reducing the IEPS on mobile services to 1.5% relative to the base case, 2020

GDP +USD 2,227m Market Mobile penetration revenues +1,108,000 net of tax connections +USD 222m REDUCING THE IEPS ON MOBILE Employment SERVICES TO 1.5% +15,000 3G/4G penetration Economy wide +766,000 investment +USD 537m connections Tax revenues +USD 294m

Source: Deloitte analysis based on operator, GSMA intelligence database, IMF and World Bank data Figure 19

43 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

• In 2020 alone, increased demand for mobile the period 2016-2020, a total of USD 7.1 services has the potential to add more billion could be added to the economy, than 1.1 million extra connections, including and employment could be provided to an 0.77 million 3G and 4G connections. Over additional 42,000 Mexicans. the period 2016-2020, a cumulative 4.6 million mobile connections could be • Moreover, despite an initial fall in tax added, of which 2.9 million are expected revenues after the reduction in tax, the to be mobile broadband connections. government could potentially achieve tax neutrality within two years and in 2020 the • This uptake in mobile penetration could increase in GDP growth has the potential to increase mobile revenues by up to an enable up to an additional USD 294 million additional USD 222 million in 2020 in tax revenues to be collected through and the productivity of Mexican more broad-based taxation. Over the period workers and businesses, potentially 2016-2020, and including the initial loss in leading to the Mexican economy being revenues, the government could gain an 0.1% more productive. additional USD 647 million.

• Through the direct impacts of the Reducing the IEPS on mobile services has mobile operators and the indirect the potential to encourage consumption and impacts generated by the activities increase access to mobile, thus promoting enabled by mobile operators, increased higher mobile penetration in Mexico. This mobile usage could lead to additional could have large positive impacts in terms GDP growth, delivering up to an additional of digital inclusion and adoption of new 3G USD 2.23 billion in 2020 alone and technologies, while at the same time increasing potentially providing employment for GDP growth and investment. an additional 15,000 Mexicans. Over

4.3 Removing the IEPS on mobile services

Rather than reducing the IEPS by half, the government could fully abolish the IEPS on mobile services. It is estimated that removing the IEPS on mobile services could potentially double the impacts of halving the IEPS and drive the following impacts:

44 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

Potential impact of removing the IEPS on mobile services relative to the base case, 2020

GDP +USD 4,455m Market Mobile penetration revenues +2,215,000 net of tax connections +USD 442m REMOVING THE IEPS ON MOBILE Employment SERVICES +23,000 3G/4G penetration Economy wide +1,531,000 investment +USD 1,073m connections Tax revenues +USD 589m

Source: Deloitte analysis based on operator, GSMA intelligence database, IMF and World Bank data Figure 20

• In 2020 alone, increased demand for • Moreover, despite an initial fall in tax mobile broadband has the potential to revenues after the reduction in tax, the add an extra 2.2 million connections, government could potentially achieve tax including 1.5 million 3G and 4G connections. neutrality within two years and in 2020 the Over the period 2016-2020, a cumulative increase in GDP growth has the potential to 9.2 million mobile connections could be enable up to an additional USD 587 million added, of which 5.9 million are mobile in tax revenues to be collected through broadband connections. more broad-based taxation. Over the period 2016-2020, and including the initial loss in • This uptake in mobile penetration could revenues, the government could gain an increase mobile revenues by up to an additional USD 1.3 billion. additional USD 442 million in 2020 and the productivity of Mexican workers Eliminating the IEPS on mobile services fully and businesses, potentially leading to could result in an even greater impact on the Mexican economy being 0.21% more digital inclusion and take-up of mobile internet, productive. delivering greater socio-economic benefits and spurring domestic and international • Through the direct impacts of the investment. mobile operators and the indirect impacts generated by the activities enabled by mobile operators, increased mobile usage could lead to additional GDP growth, delivering up to an additional USD 4.4 billion in 2020 and potentially providing employment for an additional 23,000 Mexicans. Over the period 2016- 2020, a total of USD 14.1 billion could be added to the economy and employment could be provided to an additional 62,000 Mexicans.

45 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

4.4 Reducing the regulatory fees by 10%

Regulatory fees applied on the mobile sector in Mexico can have a distortive effect on investment as they impact equally companies with high and low capital expenditure. Therefore, this type of tax can further discourage network investment and the roll-out of new generation infrastructure. In 2014, operators paid USD 485 million in recurring regulatory fees. Under the assumption that a proportion of the savings to the regulator would be passed onto consumers in the form of lower prices, reducing the total value of regulatory fee payments by 10% has the potential to generate the impacts illustrated below.

Potential impact of reducing regulatory fee payments by 10% relative to the base case, 2020

GDP +USD 591m Market Mobile penetration revenues +294,000 net of tax connections +USD 59m REDUCING THE REGULATORY FEES Employment BY 10% +3,000 3G/4G Penetration Economy wide +203,000 investment +USD 142m connections Tax revenues +USD 78m

Source: Deloitte analysis based on operator, GSMA intelligence database, IMF and World Bank data Figure 21

• In 2020 alone, increased demand for • Moreover, despite an initial fall in tax mobile services could add an extra 0.3 revenues after the reduction in tax, the million connections, including 0.2 million government could potentially achieve tax 3G and 4G connections. neutrality within two years and in 2020 the increase in GDP growth could enable • This uptake in penetration could increase up to an additional USD 78 million in tax the revenues received by the mobile sector revenues to be collected through more by USD 59 million in 2020 and aggregate broad-based taxation. investment in Mexico by up to USD 882 million over the period 2016-2020. By incentivising investment, the reduction of regulatory fees could further encourage • Through the direct impacts of the mobile network roll-out and FDI in Mexico. At the operators and the indirect impacts same time, it could spur mobile penetration generated by the activities enabled by and reduce barriers to affordability, as mobile operators, increased mobile usage operators pass on their savings to consumers. could lead to additional GDP growth, This has wider economic impacts: specifically potentially delivering an additional USD 591 higher economic growth, greater productivity million in 2020 and providing employment and growth in employment. for an additional 3,000 Mexicans.

46 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

4.5 Pricing of spectrum and other regulatory fees

As seen in Section 2, the recurring tax and fee investment decision is made. If new taxes are payments that mobile operators pay in Mexico introduced or increased after the auction or were found to represent almost 27% of market during the duration of a licence, this negatively revenue. In this context, the government could impacts the operators’ business case and can consider balancing non-recurring spectrum have adverse effects on consumers if some fees against the burden of recurring taxation in operators were to hold off investment due order to maintain the incentives to investment to taxation uncertainty. In Mexico, after the and competition in the market, while capturing significant investment incurred by operators the economic rent associated with spectrum to acquire 3G licences, the IEPS was extended ownership and covering the costs related to to mobile services and the corporation tax spectrum management76. increased from 28% to 30% in 2010.

Mobile operators are estimated to have paid In particular, high annual fees may discourage circa USD 1.27 billion since 2010 in non- operators’ investment in the upcoming recurring payments for licence renewals, 3G spectrum auction in 2016. Different ways and 4G spectrum. At the same time, annual of spectrum licencing could be considered. spectrum fees amount to circa USD 485 million Currently, the annual fees for spectrum in per year77, nearly 11% of all taxes and fees paid Mexico do not vary between frequency in 201478. bands; a flat fee is charged across all and does not reflect the lower value of higher Excessive spectrum payments and other frequency bands. Allowing for variable fees regulatory fees could negatively affect the could potentially improve the efficiency of roll-out of network infrastructure79, through: auctions, by making it more affordable for smaller operators to participate and improving • Reduced incentives to invest due to lower competition. returns on the capital employed. Efficient, equitable and stable pricing of • Increased uncertainty on future tax liability, spectrum and licence fees has the potential to which is also likely to impact investment support government revenues while ensuring decisions. the development of new technologies and encourage mobile operators to invest in new • Distortions across industries and within spectrum and network roll-out. Appropriate ICT sector due to higher costs for mobile pricing of spectrum appears a key issue if operators, further driving (local and foreign) Mexico is to embrace further uptake of mobile investment away from mobile. broadband services.

• Fees that are subject to frequent changes increase uncertainty and discourage investment both domestically and internationally.

Furthermore, when a licence or spectrum band is awarded, the final price paid reflects operators’ expectations on future cash flows, including tax disbursements, at the time the

76. Ofcom. Spectrum pricing. A statement on proposals for setting Wireless Telegraphy Act prices, 2005. 77. As estimated for 2014. 78. Deloitte analysis based on operator data. 79. Gorecki, Hennessy, Lyons, How impact fees and local planning regulation can influence deployment of telecoms infrastructure, 2011.

47 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

Reducing the IEPS on mobile services from 3% to 1.5% could reduce the cost of mobile services for consumers and add an additional 4.6 million mobile connections between 2016 and 2020.

48 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

Mobile Taxation in Mexico: 5 An Agenda for Reform

5.1 Contribution to fiscal stability

Total taxes and fees on mobile consumers and operators in Mexico add to the cost of owning and using a phone and investing in mobile networks. Reducing the level of taxation on the mobile sector may impact government revenues in the short-term. However, by increasing mobile penetration and promoting economic growth, reducing the tax burden on mobile could also increase the tax base, presenting the potential for the government to recover these revenues.

The additional economic growth arising from the reduction of the IEPS or the regulatory fees could create more revenue for the government and potentially enable the government to reach tax neutrality within two years.

The impact on government revenues of the tax policy alternatives analysed in this report are illustrated in Figure 22. The impacts of each policy are estimated independently and their interaction is not considered.

Potential additional tax revenues compared to the base case under tax policy alternatives (USD millions)

600

500

400

300

200

100

0

Million USD -100 Reducing the IEPS to 1.5% -200 Removing the IEPS -300 Reducing regulatory fees by 10% -400 2016 2017 2018 2019 2020

Source: Deloitte analysis based on operator, GSMA intelligence database, IMF and World Bank data Figure 22

49 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

5.2 Options to align mobile taxation to standard goods taxation

By transitioning to a taxation structure where Development of ICT usage across sectors: mobile is taxed equally to other goods and sectors, the government of Mexico can By reducing mobile-specific taxation, the promote digital inclusion, increase productivity government could increase the number of and generate economic growth, whilst also mobile broadband connections, promoting benefitting from increased tax revenues. digital inclusion. This has the potential to This could produce positive spillovers enable the widespread use of ICT across throughout the Mexican economy and society: areas such as healthcare, education and the the government, mobile operators, consumers provision of government services. Moreover, and the economy as a whole. Moreover, this could provide new opportunities for the subsequent spread of mobile services innovation and the development of new could contribute to the economic and applications and content, fostering further social objectives of Mexico, improving growth within the sector. access to life-enhancing services such as education and health applications and Increased economic development: facilitating the country’s transition to a knowledge-based economy. Based on the modelling described above, the tax reform alternatives examined have Interviews with the mobile sector the potential to increase the usage of mobile demonstrated a recognition of its role in services and uptake of mobile broadband and supporting Mexican government revenues and generate up to USD 532 million in additional contribute to public services. However, while investment and increase GDP by up to USD higher than standard taxation on the mobile 2.22 billion in 2020 if the IEPS on mobile sector can potentially deliver short-term services were halved. benefits to the government, it would need to be balanced with the impacts on the cost of Support in the transition towards a long-run socio-economic development. knowledge-based economy:

By working in partnership with the mobile Reforming mobile sector taxation has the operators to minimise the distortions and potential to encourage wide spread use of inefficiencies created by sector-specific mobile broadband and the development of taxation, the Mexican government has the mobile applications for use in agriculture, opportunity to make progress on its key ICT healthcare and education, and the creation and development ambitions. of local content can also promote higher- skilled employment and the transition to a knowledge-based economy.

50 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

Improved network infrastructure: Apply phased reductions of taxes on established services: Ensuring an equitable structure of regulatory fees has the potential to increase the A phased reduction of mobile specific taxes investment required to further improve mobile offers the government the opportunity to broadband network infrastructure. Moreover, benefit from the economic contribution from further international investment could allow mobile whilst limiting short-term fiscal costs. for economies of scale for mobile operators, allowing reduced prices for consumers in the Facilitate the development of emerging longer term and facilitating the spread of services through supportive taxation: mobile broadband. The growth of mobile data and other Sustainable government revenues: innovative services such as M2M applications open up the possibility for the sector to Achieving the government’s ICT objectives increase its economic value through a whole need not result in a reduction in government new generation of products and services revenues in the medium to long term. By ranging from health care services to education increasing productivity and economic growth, and finance. a reduction of the IEPS on mobile services has the potential to generate up to over USD 647 Reduce complexity and uncertainty of million in additional tax revenues cumulatively mobile taxation: over the period 2016-2020 through the expansion of the tax base. Taxation on the mobile sector has increased over the years in Mexico. Any unpredicted Based on evidence from a series of studies80 tax change that occurs after investment in and the best practice principles outlined in spectrum licence is made may negatively Table 481, as well as on consultation with GSMA impact an operator’s business plan. The risk and mobile operators, a number of areas for of future tax rises is priced into investment tax reform have been identified which could decisions and can therefore be expected to support the mobile sector to further contribute reduce both FDI and domestic investment in to economic growth and government revenues the medium-term. over and above its current impact:

Reduce specific taxation of the mobile sector:

Higher than normal taxation on mobile operators and consumers distorts production and consumption behaviour; it may limit usage of digital services, reduce the ability of mobile operators to finance investment in digital infrastructure, and can in the long term reduce government revenues.

80. GSMA/Deloitte, studies on digital inclusion and mobile taxation in Ghana, Tanzania, Pakistan; GSMA/Deloitte, Mobile taxes and Fees - A Toolkit of Principles and Evidence, 2014. 81. IMF, Tax policy for developing countries, 2001.

51 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

Appendix A: Methodology

A.1 Estimation of the economic impact of a tax change

In order to conduct the tax scenario analysis, an economic model was created to describe the mobile sector and the macro-economy of Mexico. This model is able to forecast the impacts of more than 25 sector-specific and macroeconomic variables up to 2020, which can be driven either by removing or changing current taxes and fees or by the introduction of a new tax or fee.

Firstly, a base case scenario is developed for the mobile sector and economy, where taxes and fees remain at their current level throughout the period 2016-2020. Then, a simulation of alternative policy scenarios quantifies the economic impact of reformed mobile sector taxation. It is assumed that the tax policy is implemented in 2016 and the model estimates the effects up to 2020. The impacts of each policy are estimated independently and their interaction is not considered.

52 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

Modelling the macroeconomic impact of changes to mobile taxation in Mexico

As illustrated in Figure 23, the following steps are involved in the modelling process:

Schematics for modelling the economic impacts of mobile taxation changes Sector impacts

REVENUE EMPLOYMENT CONSUMPTION OF FROM MOBILE BY OPERATORS 1 2 MOBILE SERVICES SERVICES PRICE OF 3 TAX AND FEE MOBILE PROFITABILITY OF INVESTMENT TAXES AND PROPOSAL SERVICES MOBILE SERVICES FEE PAYMENTS PASS-THROUGH PRICE ELASTICITY OF DEMAND A percentage of the tax and across di­erent groups of Changes in prices and consumption lead to a new fee payments is reflected in the consumers determines the level of revenue generated from mobile services. retail price of mobile services. impact of change in price on Tax and fee payments and labour demand will consumption. also adjust accordingly. Changes in profitability will influence the level of investment.

Economy-wide impacts 4 MULTIPLIERS 5 ESTIMATES

CORE IMPACTS SPILL-OVER IMPACTS

REAL GDP TAX REVENUE PRODUCTIVITY GROWTH

MOBILE EMPLOYMENT INEQUALITY INVESTMENT PENETRATION

Direct impacts are extrapolated onto the Other metrics use concepts well-developed in research, economy using multiplier factors, adjusted for including previous GSMA/Deloitte work on the impact of the size of the country and market structure. penetration on economic growth, to quantify spill-over e­ects.

Source: GSMA analysis Figure 23

• The tax or fee change affects the price model are described in more detail in of mobile services. This depends on the section below. the extent to which the tax reduction is passed on to consumers, modelled by a • Changes to the price of mobile services pass-through rate which determines the affect their consumption. In order to percentage of the tax and fee payments estimate this, assumptions are made on that is reflected in the retail price of the price elasticity of demand82, which mobile services. All assumptions in the measures how much demand for mobile

82. An elasticity describes the quantitative impact of a variable on another variable; the usual notation is that a 1% increase in a variable will lead to an x% change in another variable. 53 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

services will change in response to a The proliferation of mobile services is price change. captured by an increase in productivity, quantified through the change in Total • Changes in prices and consumption Factor Productivity (TFP). alter the amount of revenue generated from mobile services. Increased demand • Thanks to additional GDP growth generates additional employment from reformed taxation on mobile, the opportunities in the sector, while potential short-term loss of tax revenues increased operator revenues enable from the mobile industry can be offset additional capital expenditure on the by tax revenues from more broad-based development of network infrastructure. consumer and operator taxes.

• These sector impacts lead to economy- The inputs for the model are provided wide impacts, which are estimated by operators in Mexico, the GSMA and through assumptions that describe publicly available statistics from the World the impact of the mobile sector on the Bank and the IMF and include forecasts wider Mexican economy. These effects for 2015 and subsequent years. The include the impact on GDP, calculated outputs are derived based on estimates through a multiplier that links mobile of the elasticity of demand for mobile and 3G penetration rates to economic services from a number of developing growth, and the effect on employment, markets, while the impacts of mobile calculated through a multiplier which and broadband penetration on GDP have estimates the number of jobs created been derived from econometric studies of across the economy for every job similar developing markets. created within the telecom sector.

A.2 Key assumptions behind the model

The assumptions underlying the model expected to be generated by the Mexican have been researched from a review of telecommunication reforms. These academic literature and previous studies assumptions were based on conversations in this area. These are discussed in more with mobile operators and Deloitte analysis detail below. of telecoms markets worldwide.

Pass-through rates Price elasticity of demand

Taxes and fees paid by mobile operators A change in the price of mobile services and consumers may be completely leads to a change in the consumption of or partly passed-through to the end- these services, both in terms of ownership consumer prices. The level of pass-through and usage. Consumption changes depend of taxes and fees to final prices will depend on the price elasticity of demand, that on market power and the price elasticity is, the responsiveness of consumers to of demand, among other factors. For price changes. The assumptions regarding this analysis, an average pass-through elasticity of demand are based on a rate of 75% has been assumed for taxes review of studies conducted in a number that fall directly on retail prices. A pass- of developing markets on the elasticity through rate of 75% takes into account rates observed in recent. The elasticity the positive effects on competition of demand for mobile subscriptions is

54 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

assumed to be -1.0383. For those that conducted by the GSMA on the impact own mobile devices, demand for mobile of mobile and 3G penetration on GDP services is more elastic: the elasticity of growth estimated that a 1% increase in demand for mobile services is assumed market penetration leads to an increase in to be -1.19, based on a number of studies GDP growth of 0.14 percentage points86. In within the field84. terms of the impact of internet penetration, it is assumed that a 1% increase in internet Employment multiplier penetration increases the GDP growth rate by 0.077 percentage points87. This model The employment multiplier is used does not consider switching between 2G to estimate the impact of a change and 3G services and so these impacts are in employment in the sector on total treated separately88. employment in the economy. The magnitude depends on the economic Total Factor Productivity Impact features of the sector, such as the degree of interconnection across the supply chain. The impact on TFP is calculated based The employment multiplier is assumed on the change in GDP, employment and to be 6.2185. That is, for every additional investment. TFP is a measure of economic job created within the mobile sector, an productivity that accounts for changes additional 6.21 jobs are generated in the in output over and above those expected wider Mexican economy. as a result of increased employment and investment. It is defined as follows: Market penetration Impact TFP = GDP CapitalaLabourß There is substantial evidence in the literature on the impact of mobile where it is assumed that a = 0.3 and ß=0.789. penetration on GDP growth. Analysis

A.3 Scenario simulation results

This report uses a macroeconomic model in order to assess the impacts of a change in taxation policy on the mobile sector and the wider economy. Three scenarios were addressed and each compared against the base case scenario, where there is no change in tax policy. The overall findings of each scenario are described in more detail in the sections below, on the assumption that the change in tax policy is implemented in 2016.

83. Baigorri and Maldonado (2010); UK Competition Commission, 2003. 84. See, for example: Gruber and Kontroupis, 2010, Mobile telecommunications and the impact on economic development; Wheatley, J. J., 1998, Price elasticities for telecommunication services with reference to developing countries; GSMA, 2005, Tax and the digital divide: How new approaches to mobile taxation can connect the unconnected. London: GSMA. 85. This figure was based on a number of studies conducted in developing and developed countries; see, for example, Moretti, 2010; O2 for ONS, 2002; Ovum, 2010; Zain, Ericsson, 2009; Kaliba et al, 2006. 86. This is based on a study of 40 economies over the period 1996-2011; for full details of the methodology, see http://www.gsma.com/publicpolicy/wp-content/uploads/2012/11/gsma-deloitte-impact-mobile-telephony-economic-growth.pdf. 87. Qiang, C. Z. W., Rossotto, C.M., 2009, Economic Impacts of Broadband, in Information and Communications for Development 2009: Extending Reach and Increasing Impact, World Bank, Washington D.C., 35-50. 88. That is, given that it is not known whether a new 3G subscriber may previously have been a mobile user, this is treated as an increase in internet penetration only, not as an increase in mobile and internet penetration. 89. Bassanini A and Scarpetta S, 2001, "The Driving Forces of Economic Growth: Panel Data Evidence for the OECD countries".

55 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

Scenario 1

Scenario 1 models the reduction of the IEPS on mobile services from 3% to 1.5%. In particular, the reduced cost of usage following such reduction in the IEPS could stimulate an additional 1.1 million mobile connections in 2020, with a forecasted increase by 1.8 billion minutes of use relative to the base case. This could raise total market penetration by 0.82% relative to the base case in 2020, extending access to mobile telephony across Mexico. The increased affordability has the potential to encourage consumers to take-up new services and additional 3G/4G connections could be up to 763,000 in 2020.

Potential additional impact on total mobile penetration (left) and mobile broadband penetration (right) in Scenario 1 relative to the base case

900 1,200 800 1,000 700

800 600 500 600 '000 '000 400

400 300 Total connections, connections, Total connections 3G/4G 200 200 100

0 0 2017 2017 2016 2018 2019 2016 2018 2019 2020 2020

Source: Deloitte analysis based on operator, GSMA, IMF and World Bank data Figure 24

The increase in connections could subsequently benefit both the mobile sector and wider economy. Increased usage could increase operator revenues by USD 0.22 billion, enabling an additional USD 17 million of capital expenditure, which could be used for expanding additional sites across Mexico, further increasing coverage of mobile broadband services. Increased economic activity and the development of technology and innovation as a result of the growth of the mobile sector could then be reflected in an additional USD 2.22 billion and USD 0.53 billion in GDP and investment respectively relative to the base case in 2020, whilst employment could also rise by over 15,000 relative to the base case.

56 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

Potential additional impact on macroeconomic indicators in Scenario 1 relative to the base case

Investment GDP

0.6 2.5

0.5 2.0

0.4 1.5 0.3 1.0 Billions USD 0.2 Billions USD

0.5 0.1

0.0 0.0 2017 2017 2018 2019 2018 2019 2020 2020

Net mobile revenues Employment

0.25 18 16 0.20 14 12 0.15 10 8 0.10 Thousands Billions USD 6

0.05 4 2 0 0 2017 2017 2016 2016 2018 2019 2018 2019 2020 2020

Source: Deloitte analysis based on operator, GSMA, IMF and World Bank data Figure 25

As a consequence of wider economic growth, it is estimated that the government of Mexico could also benefit from increased tax revenues in 2020 relative to the base case. Although tax revenues could fall in the first years following the reduction in the IEPS, the expansion of the tax base following wider economic growth could allow for tax neutrality in 2017 and an increase in tax revenues by over USD 294 million relative to the base case in 2020.

Potential tax revenues in Scenario 1 relative to the base case

400

300

200

100

milions USD 0 revenues, Government -100

-200

2016 2017 2018 2019 2020

Source: Deloitte analysis based on operator, GSMA, IMF and World Bank data Figure 26 57 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

Scenario 2

Scenario 2 models the abolition of the IEPS on mobile services. It is estimated that the reduction in the cost of mobile services could stimulate an additional 2.2 million mobile connections in 2020 relative to the base case. This represents a 1.63% increase in total mobile penetration relative to the base case. Furthermore, the reduced cost of mobile usage could generate an additional 3.6 billion minutes in 2020 compared to the base case scenario.

Potential additional impact on total mobile penetration (left) and mobile broadband penetration (right) in Scenario 2 relative to the base case

2,500 1,800

1,600

2,000 1,400

1,200 1,500 1,000 '000 '000 800 1,000 600 connections 3G/4G 400 mobile connections Total 500 200

0 0 2017 2017 2016 2018 2019 2016 2018 2019 2020 2020

Source: Deloitte analysis based on operator, GSMA, IMF and World Bank data Figure 27

Positive spillovers across the economy as a consequence of this growth could stimulate an additional USD 4.4 billion in GDP and USD 1.1 billion worth of investment in 2020 relative to the base case. This could create employment opportunities for over 23,000 Mexicans, whilst this workforce could also be 0.21% more productive.

The increase in usage and take-up of new services could also benefit mobile operators in the form of an additional USD 0.44 billion in total sector revenues. This could allow mobile operators to increase capital expenditure on the development of network capacity by USD 26 million relative to the base case in 2020, which could deliver additional mobile broadband sites across the region.

58 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

Potential additional impact on macroeconomic indicators in Scenario 2 relative to the base case

Investment GDP

5.0 1.2

1.0 4.0

0.8 3.0

0.6 2.0 Billions USD 0.4 Billions USD

1.0 0.2

0.0 0.0 2017 2017 2018 2019 2018 2019 2020 2020

Net mobile revenues Employment

25 0.5

20 0.4

15 0.3

10 0.2 Thousands Billions USD

0.1 5

0 0 2017 2017 2016 2018 2019 2016 2018 2019 2020 2020

Source: Deloitte analysis based on operator, GSMA, IMF and World Bank data Figure 28

Together with this macroeconomic improvement, the government of Mexico stands to benefit from increased tax revenues as a result of wider economic growth and the expansion of the tax base. It is estimated that the government could achieve revenue neutrality by 2017 with tax revenues of USD 588 million in 2020.

59 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

Potential tax revenues in Scenario 2 relative to the base case

800

600

400

200

milions USD 0 revenues, Government -200

-400 2016 2017 2018 2019 2020

Source: Deloitte analysis based on operator, GSMA, IMF and World Bank data Figure 29

Scenario 3

The third scenario models the reduction of the regulatory fees by 10%. Through the savings achieved by mobile operators, this could increase investment and demand for mobile services, meanwhile decreasing barriers to affordability and thus further sustaining penetration and economic growth.

The tax reduction could decrease the cost of accessing mobile services, increasing total connections by 294,000 of which 203,000 could be mobile broadband enabled. It is estimated that this could represent an increase in total mobile penetration of 123,000 unique subscribers relative to the base case in 2020.

60 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

Potential additional impact on total mobile penetration (left) and mobile broadband penetration (right) in Scenario 3 relative to the base case

350 250

300 200 250

200 150 '000 150 '000 100

100 connections 3G/4G

mobile connections Total 50 50

0 0 2017 2017 2016 2018 2019 2016 2018 2019 2020 2020

Source: Deloitte analysis based on operator, GSMA, IMF and World Bank data Figure 30

The increase in usage of mobile services could increase net operator revenues by USD 59 million relative to the base case in 2020. The positive spillovers from the mobiles sector, particularly towards the development of technology and knowledge-based sectors in Mexico, have the potential to increase GDP and investment across Mexico by USD 591 million and 142 million respectively, whilst also increasing employment by over 3,000 relative to the base case in 2020.

61 DIGITAL INCLUSION AND MOBILE SECTOR TAXATION IN MEXICO

Potential impacts on macroeconomic indicators in Scenario 3 relative to the base case

Investment GDP

0.20 0.70 0.18 0.60 0.16 0.14 0.50 0.12 0.40 0.10 0.08 0.30 Billions USD Billions USD 0.06 0.20 0.04 0.10 0.02 0.00 0.0 2017 2017 2018 2019 2018 2019 2020 2020

Net mobile revenues Employment

0.07 3.5

0.06 3.0

0.05 2.5

0.04 2.0

0.03 1.5 Thousands Billions USD 0.02 1.0

0.01 0.5

0.00 0 2017 2017 2016 2018 2019 2016 2018 2019 2020 2020

Source: Deloitte analysis based on operator, GSMA, IMF and World Bank data Figure 31

The increase in growth of the mobile sector and wider economy, following the reduction in regulatory fees, could subsequently broaden the tax base and hence government tax revenues over time. It is estimated that by 2017 the government of Mexico could start gaining tax revenues following an initial loss of USD 46 million in 2016. Indeed in 2020, the government could potentially gain USD 78 million in tax revenues in 2020.

Potential tax revenues in Scenario 3 relative to the base case

100

80

60

40

20

milions USD 0

revenues, Government -20

-40

-60 2016 2017 2018 2019 2020

Source: Deloitte analysis based on operator, GSMA, IMF and World Bank data Figure 32 62 GSMA Head Office Level 2, 25 Walbrook London, EC4N 8AF, United Kingdom Tel: +44 (0)207 356 0600 www.gsma.com

©GSMA 2015